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Strategic Management Department of Finance Jagannath University, Dhaka.

Prepared by Md. Mazharul Islam Jony Khadizatuz Zohara Mily


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About the Author

About the Author

Md. Mazharul Islam Jony, studying BBA, major in Finance at Jagannath University, Dhaka. He has completed his HSC from Cantonment College, Jessore and SSC from Chowgacha Shahadat Pilot High School, Chowgacha, Jessore with the highest performance result in 2006 and 2008 consecutively. His favorite hobby is to search new teaching technique and learning method.

Khadizatuz Zohara Mily, studying BBA, major in Finance at Jagannath University, Dhaka. She has completed her SSC and HSC examination from Mollartek Udayan School and College, Uttara, Dhaka with the highest performance result, GPA 5 in 2006 and 2008 consecutively. Her favorite hobby is reading different types of story books.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com Mobile: 01198150195 http://jagannath.academia.edu/jony007ex

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com


Strategic Management

Strategic Management

Name of chapters included in this book Serial number 1 2 3 4

Name of the chapter

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The Strategic Management Process External Analysis Internal Analysis Building Competitive Advantage through Functional Level Strategy 5 Building Competitive Advantage through Business Level Strategy 6 Strategy in High Technology Industries 7 Corporate Strategy Part-I Part-II 8 Implementing Strategy Shortcut Learning 1 The Strategic Management Process 2 External Analysis 3 Internal Analysis 4 Building Competitive Advantage through Functional Level Strategy 5 Building Competitive Advantage through Business Level Strategy 6 Strategy in High Technology Industries 7 Corporate Strategy Part-I Part-II 8 Implementing Strategy

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Strategic Management

Chapter- 1 The Strategic Management Process

Overview: Why do some organizations succeed and others fail? An answer can be found in the subject matter of this course. This course is about strategic management and the advantages that accrue to organizations that think strategically. A strategy is a course of action that managers take in the effort to attain superior performance. Strategy can also be defined as “A general direction set for the company and its various components to achieve a desired state in the future. Strategy results from the detailed strategic planning process”. Understanding the roots of success and failure is not an empty academic exercise. Through such understanding comes a better appreciation for the strategies that must be pursued to increase the probability of success and reduce the probability of failure.

Features of Strategy 1. Strategy is Significant because it is not possible to foresee the future. Without a perfect foresight, the firms must be ready to deal with the uncertain events which constitute the business environment. 2. Strategy deals with long term developments rather than routine operations, i.e. it deals with probability of innovations or new products, new methods of productions, or new markets to be developed in future. 3. Strategy is created to take into account the probable behavior of customers and competitors. Strategies dealing with employees will predict the employee behavior. Strategy is a well-defined roadmap of an organization. It defines the overall mission, vision and direction of an organization. The objective of a strategy is to maximize an organization’s strengths and to minimize the strengths of the competitors. Strategy, in short, bridges the gap between “where we are” and “where we want to be”.

Strategic Management Strategic Management is all about identification and description of the strategies that managers can carry so as to achieve better performance and a competitive advantage for their organization. An organization is said to have competitive advantage if its profitability is higher than the average profitability for all companies in its industry. Strategic management can also be defined as a bundle of decisions and acts which a manager undertakes and which decides the result of the firm’s performance. The manager must have a thorough knowledge and analysis of the general and competitive organizational environment so as to take right decisions. They should conduct a SWOT Department of Finance

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Strategic Management Analysis (Strengths, Weaknesses, Opportunities, and Threats), i.e., they should make best possible utilization of strengths, minimize the organizational weaknesses, make use of arising opportunities from the business environment and shouldn’t ignore the threats. Strategic management is nothing but planning for both predictable as well as unfeasible Contingencies. It is applicable to both small as well as large organizations as even the smallest organization face competition and, by formulating and implementing appropriate strategies, they can attain sustainable competitive advantage. Strategic Management is a way in which strategists set the objectives and proceed about attaining them. It deals with making and implementing decisions about future direction of an organization. It helps us to identify the direction in which an organization is moving. Strategic management is a continuous process that evaluates and controls the business and the industries in which an organization is involved; evaluates its competitors and sets goals and strategies to meet all existing and potential competitors; and then reevaluates strategies on a regular basis to determine how it has been implemented and whether it was successful or does it needs replacement. Strategic Management gives a broader perspective to the employees of an organization and they can better understand how their job fits into the entire organizational plan and how it is co-related to other organizational members. It is nothing but the art of managing employees in a manner which maximizes the ability of achieving business objectives. The employees become more trustworthy, more committed and more satisfied as they can co-relate themselves very well with each organizational task. They can understand the reaction of environmental changes on the organization and the probable response of the organization with the help of strategic management. Thus the employees can judge the impact of such changes on their own job and can effectively face the changes. The managers and employees must do appropriate things in appropriate manner. They need to be both effective as well as efficient. One of the major role of strategic management is to incorporate various functional areas of the organization completely, as well as, to ensure these functional areas harmonize and get together well. Another role of strategic management is to keep a continuous eye on the goals and objectives of the organization.

Objectives of Strategic Management       

To analyze the strategies To formulate strategies To assess strength and Opportunities To identify core competencies To Make differentiation program To obtain cost effectiveness To expand market growth.

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Strategic Management

Strategic Management Model:

Company mission, social responsibility and ethics

Internal Analysis

External Environment (Global & Domestics)  Remote (National)  Industry  Operating Environment

   

Strengths Weakness Resources Capabilities

Long-term Objectives

Feedback

Feedback

Strategic Analysis and Choices (SWOT Analysis)

Generic and Grand Strategies

Short term objectives; reward system

Functional Tactics

Empowering Policies

Organizational Structure, Leadership and Culture

Strategic Control, Innovation and Entrepreneurship

Figure: Strategic Management Model

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Strategic Management

Critical tasks of Strategic Management: Strategic management comprises nine critical tasks: 1. Formulating the company’s mission- including broad statements about its purpose, philosophy and goals. 2. Developing a company profile- that reflects its internal conditions and capabilities. 3. Assessing the company’s external environment- including both the competitive and general contextual factors. 4. Analyzing the company’s options - by matching its resources and the external environment. 5. Identifying the most desirable options - by evaluating each option in light of the company’s mission. 6. Selecting a set of long term objectives and grand strategies - that will achieve the most desirable options. 7. Developing annual objectives and short-term strategies that are compatible with the selected set of long-term objectives and grand strategies. 8. Implementing the strategic choices by means of budgeted resource allocations in which the matching of tasks, people, structures, technologies, and reward systems is emphasized. 9. Evaluating the success of the strategic process as an input for future decision making.

The basic characteristic of strategic management process In strategic management long-term and integrated planning producing and implementation have to be done. The characteristics and features of the long term strategic are as followed:Flexibility: It is one of the important features in strategic management. In the case of determining long term strategies, several intricate problems and hazards can be visible, on that case, the management can take hurried decision adapting to changed environment. Integration: To take planning under the strategic management, it is essential to integrate goals objects alongside the internal and external sides of the institution. Speed: To bring the dynamism under the strategic management, it is inevitable to access the important affairs so that it may be possible to speed up the pace of action at present and future.

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Strategic Management Innovation: Innovation or creativity is an important feature in the case of strategic management. We know, environment is ever changing, that is way demand, taste, and behavioral patterns of employers and employees are to be changed. Strategic management controls and takes things forward by producing new strategic planning and framing newer strategies. Long-term plan: Long-term planning is very essential to bring good result. There is no way to adopt long-term planning if anybody intends to compete in the field of industry. Guide-line of plan: Guide-line of planning pin-points to implement any planning under the strategic management. Determination of alternatives: It is a very urgent affair to implement goals of any institution. Under the strategic management, determination of alternatives can face obstacles standing on the way easily. Consideration of environment: This tool which can move anybody to achieve goals ignoring all unfavorable environments consideration of environment directs to take decision cautiously. Superior Performance and Competitive Advantage: Components of successful strategy: 1. Superior performance 2. Competitive advantage 3. Business model 4. Favorable competitive or industry environment. Superior Performance: For businesses, superior performance is demonstrated through above-average profitability, as compared to other firms in the same industry. Profitability is typically measured using after-tax return on invested capital. The strategies that an organization’s managers pursue have a major impact on its performance relative to its peers. Competitive Advantage: When a firm’s profitability is greater than the average profitability for all firms in its industry, it has a competitive advantage over its rivals. The greater the profitability, the greater is its competitive advantage. A sustained competitive advantage occurs when a firm maintains above-average profitability for a number of years. Business model: A business model describes managers’ beliefs about how a firm’s strategies will lead to competitive advantage and superior profitability. An appropriate business model is one component of a successful strategy.

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Strategic Management Favorable competitive or industry environment: It is important to recognize that in addition to its business model and associated strategies, a company’s performance is also determined by the characteristics of the industry in which it competes. Different industries are characterized by different competitive conditions. In some, demand is growing rapidly; in others, it is contracting. Some might be beset by excess capacity and persistent price wars, others by strong demand and rising prices. In some, technological change might be revolutionizing competition. Others might be characterized by stable technology. Thus, the different competitive conditions prevailing in different industries might lead to differences in profitability and profit growth. For example, average profitability might be higher in some industries and lower in other industries because competitive conditions vary from industry to industry. Strategic Managers and Strategic Leadership: A.

General Managers are responsible for the overall performance of the organization or for one of its major self-contained divisions.

B.

Functional managers are responsible for specific business functions, such as human resources, purchasing, production, sales, customer service, and accounts.

Levels of Strategic Management: The three main levels of management are the corporate level, the business level, and the functional level. General Managers are found at the first two of these levels but their strategic roles differ, depending on their sphere of responsibility. Functional managers too have a strategic role, though of a different kind.

Figure 1.2: Levels of Strategic Management 1. The corporate level consists of the CEO, board of directors, and corporate staff. The CEO’s role is to define the mission and goals of the firm, determine what businesses the firm should be in, allocate resources to the different business areas of the firm, and formulate and implement strategies that span individual businesses.

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Strategic Management 2. The business level consists of the heads of the individual business units (divisions) and their support staff. Business unit (divisional) CEOs’ role is to translate general statements of intent at the corporate level into concrete strategies for individual businesses. 3. The functional level consists of the managers of specific business operations. They develop functional strategies that help fulfill the business- and corporatelevel strategic goals. They provide most of the information that makes it possible for business and corporate-level general managers to formulate strategies. They are closer to the customer than the typical general manager, and therefore functional managers may generate important strategic ideas. They are responsible for the implementation of corporate- and business-level decisions.

Strategic Management Imperatives:

Strategic Management Imperatives

External Assessment

Internal Assessment

Business Level Strategy Operational Level

Corporate Level

International Level

Challenges of Strategic Implementation Leadership for Organizational Learning Contextual for Change

System Levels for Change

Action Levels for Change

Figure: Strategic Management Levels

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Strategic Management Benefits of Strategic Management Strategic management includes strategic planning, implementation and review/control of the strategy of an organization. All most all the modern organizations engage in strategic management to ensure that they achieve the desired level of performance. There are many benefits that an organization can obtain by engaging in strategic management and they can be described as follows:  Better guidance: Strategic management process clearly defines what is the desired level of performance (mission/goals/objectives) and it sets the direction so that everyone in the organization knows where are they heading towards. Strategic management act as a road map to everyone in the organization and it clearly defines the way to get to the final destination/desired level of performance.  Alert Management: Strategic management identifies the critical factors that are strategically important to the organization. When critical factors are identifies company can analyze and take relevant measures to ensure satisfactory performance in those areas.  Understanding the changing environment: Strategic management predicts the future changes that can take place. Predicting future changes that can take place will help the organization to be proactive and take necessary steps to manage change with contingency planning and change management strategies.  Obtaining sustainable competitive advantage: This is the most important and the most critical benefit of strategic planning. By a successful strategic management process company should be able to build a competitive advantage over other competitors which can be sustained overtime without being imitated or outperformed by its competitors. Strategic management identifies the competitive advantages that can be generated through strengths of the organization and take necessary steps to effectively obtain it.  Lead to better performance: The successful strategic management should ensure that the company performs very well and generates profits for its owners. When the competitive advantage is built company can thrive on that to make profits and record good performance.  Ensure the long term survival in the market place: Strategic management identifies opportunities and threat that influence the organizational performance. It makes use of opportunities and minimize threat to make sure that company can survive in the market by outperforming its rivals.  Simplifies complex scenarios and develop suitable strategies: Current business world is too complex, volatile and dynamic. A firm without strategic management finds it hard to interprets the complexities faced by the organization. In contrast firm with strategic management makes the business complexities simple, predict future dynamics and take proactive steps to minimize threats and make use of opportunities.

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Strategic Management Winning strategy A strategy is what we do to win, not what we are. A good strategy meets customer’s need in a manner favorable to us. A good strategy is hard, often painful, to execute. Three questions answers the winning strategy, 1. How well does the strategy fit for the organization? 2. Is the strategy helping the company to achieve a sustainable competitive advantage? 3. Is the strategy resulting in better company performance?

Strategic Business Unit (SBU)

An autonomous division or organizational unit, small enough to be flexible and large enough to exercise control over most of the factors affecting its long-term performance. Because strategic business units are more agile (and usually have independent missions and objectives), they allow the owning conglomerate to respond quickly to changing economic or market situations. An SBU may be a business unit within a larger corporation, or it may be a business unto itself. Corporations may be composed of multiple SBUs, each of which is responsible for its own profitability. General Electric is an example of a company with this sort of business organization. SBUs are able to affect most factors which influence their performance. Managed as separate businesses, they are responsible to a parent corporation. General electric has 49 SBUs. The Strategic Business Unit (SBU) is an independent business unit within the company that focuses on resource-optimization to achieve maximum company value by providing products and services to internal and third party customers.

In order to identify SBU, a business is defined on the basis of consumer-orientation (not product-orientation) in terms of three dimensions:  Customer needs to be met,  Group of customers to be served  Product or service to fulfill those needs.

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Strategic Management The SBU has three features:  It is a collection of related products meeting similar needs.  The unit has its own rivals and it wants to surpass them through best marketing strategies.  The manager of SBU organization is directly responsible for strategic marketing planning, control and profits. Each SBU manager is given a set of strategic planning goals and the requisite finance. The manager will present SBU marketing strategic plan to the corporation which will give its sanction with a few modifications, if essential. The manager of SBU will formulate a distinctive plan of marketing objectives and strategies, distinctive marketing-mix for the target market, i.e., chosen market segment. Each SBU will have its own distinct mission, competition and strategy. General Electric Corporate planning model pioneered Strategic Business Unit (SBU) concept. It divided 200 odd departments into a limited number of SBUs. Advantages:  Promotes accountability since units’ heads are responsible for individual SBU profitability  Career development opportunities are further higher in this structure  Allow better control of categories of products manufacturing, marketing and distributions  Helps to expand in different related and unrelated businesses Disadvantages:  May provide inconsistent approach to tackle customers, etc. because each unit may work in its own way to handle situations  High cost approach. The concept of SBU provides precise and practical direction to the process of corporate strategic planning. In India SBU concept is adopted by big businesses in corporate strategic planning. Note: SBU is a unit in change of strategic marketing planning in a big corporation.

Strategic Management process: Strategic management is a process or series of steps. The basic steps of the strategic management process are (presented in figure)  identifying or defining business mission, purpose and objectives,  environmental (including global) analysis to identity present and future opportunities and threats,  organizational analysis to assess the strengths and weaknesses of the firm,  developing alternative strategies and choosing the best strategy,  strategy implementation, and  Strategic evaluation and control.

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Strategic Management

Steps of Strategic Management Process: Identifying Defining Business Mission, Purpose and Objectives: Identifying or defining an organization’s existing mission, purpose and objectives is the logical starting point as they lay foundation for strategic management. Every organization has a mission, purpose and objectives, even if these elements are not consciously designed, written & communicated. These elements relate the organization with the society and states that it has to achieve for itself and to the society. Objective Setting Process Defining the guiding Philosophy

Defining the purpose

Defining the mission

Strategy selection process

Environmental Scanning and Forecasting

Competitive Analysis

Identifying Strategic Alternation

Strategy Evaluation and Selection

Establishing long range objectives

Internal Organizational Analysis

Global Strategy Formulation

Strategic Control System Organizational structure leadership and motivational systems

Establishing short range objective developing budgets and functional strategies

Strategy Evaluation

Strategy Formulation

Figure: Strategic Management Process of decision making

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Strategic Management Environmental Analysis: Environmental factors both internal environment and external environment are analyzed to: i. identify changes in the environment, ii. Identify present and future threats and opportunities, and iii. Assess critically its own strengths and weaknesses. Organizational environment encompasses all factors both inside and outside the organization that can influence the organization positively and negatively. Environmental factors may help in building a sustainable competitive advantage. Revise Organizational Direction: A thorough analysis of organization’s environment pinpoints its strengths, weaknesses, opportunities and threats (SWOT). This can often help management to reaffirm or revise its organizational direction. Strategic Alternatives and Choice: Many alternative strategies are formulated based on possible options and in the light of organizational analysis and environmental appraisal. Alternative strategies will be ranked based on the SWOT analysis. The best strategy out of the alternatives will be chosen. The steps from identification of business mission, purpose and objectives of alternative strategies and choice can be grouped into the broad step of strategy formulation. Strategy Implementation: The fifth step of strategic management process is the implementation of strategy. The logically developed strategy is to be put into action. The organization cannot reap the benefits of strategic management, unless the strategy is effectively implemented. The managers should have clear vision and idea about the competitor’s strategy, organization’s culture, handling change, skills of the managers-in-charge of implementation and the like. The progress from the stage of identification of business mission, purpose and objectives to the stage of achieving desired performance must overcome many obstacles. Strategic Evaluation and Control: The final step of strategic management process is strategic evaluation and control. It focuses on monitoring and evaluating the strategic management process in order to improve it and ensure that it functions properly. The managers must understand the process of strategic control and the role of strategic audit to perform the task of control successfully.

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Strategic Management

Hierarchy of Strategic Management Strategies exist at different levels in an organization; they are classified according to the scope of what they are intended to accomplish. Most organizations can be segmented into business units (or strategic business units as they are frequently called.) The typical large, multidivisional business firm has seven levels of strategy. They are, Purpose: It covers issues on purpose of the organization: values, vision, mission, and objectives, corporate governance, corporate responsibility and ethical issues, Stakeholder analysis. Governance Structure

Strategic Purpose Social Responsibility and Ethics

Stakeholder Expectations

Mission: A mission describes the organization’s basic function in society, in terms of the products and services it produces for its customers. Mission of an organization is the purpose for which the organization is. Mission is again a single statement, and carries the statement in verb. Mission in one way is the road to achieve the vision. Objective: A broadly defined objective that an organization must achieve to make its strategy succeed. Strategic objectives are, in general, externally focused fall into eight major classifications: (1) Market standing: desired share of the present and new markets; (2) Innovation: development of new goods and services, and of skills and methods required to supply them; (3) Human resources: selection and development of employees; (4) Financial resources: identification of the sources of capital and their use; (5) Physical resources: equipment and facilities and their use; (6) Productivity: efficient use of the resources relative to the output; (7) Social responsibility: awareness and responsiveness to the effects on the wider community of the stakeholders; (8) Profit requirements: achievement of measurable financial well-being and growth.

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Strategic Management

Purpose Mission Objective Corporate Strategy Business Unit Strategy Functional Strategy Operating strategies

Figure: Hierarchical relationships between purpose, mission, objectives, corporate strategy, business (competitive) strategies, functional strategies and operating strategies.

Corporate strategy: Corporate strategy describes a company`s overall direction in terms of its general attitude toward growth and the management of its various businesses and product lines to achieve a balanced portfolio of products and services. Additionally, it is (a) the pattern of decisions regarding the types of businesses in which a firm should be involved, (b) the flow of financial and other resources to and from its divisions, and (c) the relationship of the corporation to key groups in its environment. Corporate strategy may be one of stability, growth, or retrenchment. Business strategy: Business strategy, sometimes called competitive strategy, usually is developed at the divisional level, and emphasizes improvement of the competitive position of a corporation`s products or services in the specific industry or market segment served by that division. A division`s business strategy probably would stress increasing its profit margin in the production and sales of its products and services. Business strategies also should integrate various functional activities to achieve divisional objectives. Business (competitive) strategy may be one of overall cost leadership or differentiation. Functional strategy: Functional strategy is concerned primarily with maximizing resource productivity. Within the constraints of the corporate and business strategies around them, functional departments develop strategies to pull together their various activities and competencies to improve performance. For example, a typical strategy of a marketing department might center on developing ways to increase the current year`s sales over those of the previous year. Under a market development functional strategy, the department would attempt to sell current products to different customers in the current market or to new customers in a new geographical area. Examples of R&D functional strategies are technological followership (imitate the products of other companies) and technological leadership (pioneer an innovation).

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Strategic Management Operating Strategy: An operating strategy is basically how they are planning on running the business. For example: Microsoft might have an operating strategy by which they target businesses in the construction business for their new software and offering this software as a low cost alternative to another, competing software. They would achieve this through research and proper marketing in conjunction with cost controls. At last we can say that, The specific operation of the hierarchy of strategy may vary from one corporation to another. In top-down strategic planning, corporate-level management initiates the strategy formulation process and calls on divisions and functional units to formulate their own strategies as ways of implementing corporatelevel strategies. Another approach is bottom-up strategic planning, in which the strategic proposals from divisional or functional units initiate the strategy formulation process. Strategy formulation leads from the functional level to the divisional level and from the divisional to the corporate level. A third means of strategic planning, the interactive approach, emphasizes the fact that in most companies the origin of the strategy formulation process isn`t as important as the resultant interaction between levels. This approach involves a lot of negotiation between levels in the hierarchy so that the various objectives, strategies, policies, programs, budgets, and procedures fit and reinforce each other. It represents a continuous process of adjustment between the formulation and implementation of each level of strategy.

Strategic Planning: The formal strategic management planning process can be broken down into a number of components. Each component forms a section of this course. Thus it is important to understand how the different components fit together. Together, the components form a cycle, from strategy formulation to implementation. After implementation, the results that are obtained must be monitored, and the results become an input to the formulation process on the next cycle. Thus the strategic process is continuous. The components are organized into two phases. The first phase is strategy formulation, which includes selection of the corporate mission, values, and goals; analysis of the external and internal environments; and the selection of appropriate strategies. The second phase is strategy implementation, which includes corporate governance and ethics issues, as well as the actions that managers take to translate the formulated strategy into reality.

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Strategic Management

Figure 1.3: Main Components of the Strategic Planning Process Steps to Strategic Planning: The various steps to strategic planning are– 1. Customer Need. Find out the future needs of the customer. What are the requirements? How the organization meets and exceeds expectations? 2. Customer Positioning. Determine where your organization is in relation to customer. Do you want to retain, reduce or expand the customer network? 3. Predict the Future. Demographics, economic forecasts, technical assessments need to be carefully analyzed to predict the future conditions that affect your product.

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Strategic Management 4. gap analysis. Find out the gaps between the current state & future state of your organization. 5. Closing the gap. Develop the plan to close the gap by establishing goals & responsibilities. 6. Alignment. Align the plan with mission, vision and core values & concept of your organization. 7. Implementation. Allocate the resources to collect data, designing changes and overcoming resistance to change. The planning group or committee should meet at least once a year to assess and take any corrective action needed. 8. Strategic planning or strategy formulation is the key steps of strategic management. The planned or formulated strategy is implemented to achieve desired objectives.

Corporate Mission, Values and Goals: 1.

A corporate mission or vision is a formal statement of what the company is trying to achieve over a medium- to long-term time frame. The mission states why an organization exists and what it should be doing. Abell used a customer-oriented definition when he claimed that a mission statement should describe the customer, their needs, and the method the firm will use to satisfy those needs. A vision statement identifies where the organization wants or intends to be in future or where it should be to best meet the needs of the stakeholders. It describes dreams and aspirations for future.

Figure 1.4: Abell’s Framework for Defining the Business

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Strategic Management Features of a Mission: An effective mission statement must have following featuresa. b. c. d.

Mission must be feasible and attainable. It should be possible to achieve it. Mission should be clear enough so that any action can be taken. It should be inspiring for the management, staff and society at large. It should be precise enough, i.e., it should be neither too broad nor too narrow. e. It should be unique and distinctive to leave an impact in everyone’s mind. f. It should be analytical, i.e., it should analyze the key components of the strategy. g. It should be credible, i.e., all stakeholders should be able to believe it. Features of a Vision: An effective vision statement must have following featuresa. b. c. d. e.

It must be unambiguous. It must be clear. It must harmonize with organization’s culture and values. The dreams and aspirations must be rational/realistic. Vision statements should be shorter so that they are easier to memorize.

2.

The values of a company state how managers and employees should conduct themselves, how they should do business, and what kind of organization they should build to help a company achieve its mission. Values are the foundation of a company’s organizational culture. Values include respect for the organization’s diverse stakeholders.

3.

A goal is a desired future state or an objective to be achieved. Corporate goals are a more specific statement of the ideas articulated in the corporate mission. Wellconstructed goals are precise and measurable, address crucial issues, are challenging but realistic, and have a specified time horizon for completion. Wellmade goals have following features1. These are precise and measurable. 2. These look after critical and significant issues. 3. These are realistic and challenging. 4. These must be achieved within a specific time frame. 5. These include both financial as well as non-financial components.

Types of missions Targeting mission: stated as a clear specific company goal Common-enemy mission: company goal of defeating a corporate rival Role-model mission: company goal of imitating the characteristics and practices of a successful company Internal-transformation mission: company goal of remaining competitive by making dramatic changes in the company

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Strategic Management

Elements/ Contents of a Mission Statement/Format No one can deny the importance of a mission statement in motivating a business. Mission statement not only helps the business to remain on its track but also helps determining the very purpose of its existence. Finding a perfect mission statement is never possible. Mission statements are made, followed and updated continuously. Updates are made due to many reasons like change in business, change in business philosophy or any other major change that would result in substantial deviation for the organization from the earlier path it laid down in its mission statement. There are nine elements which involve in making a mission statement. Each good mission statement incorporates all of these elements in it. These elements are. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Customers Products or Services Markets Technology Concern for survival, growth and profitability Philosophy Self-concept Concern for public image Concern for employees

Here is a glimpse of what each of these elements states about in a mission statement  Customers: In this element the organization mentions who are its customers or potential customers. What will it do to serve them and how will its customers find this organization different from the other organizations providing similar products or services in the market.  Products or Services: In mission statement a business has to mention the producer or service or both they are providing. By defining products or services the company distinguishes its offered products or services from competitive products or services of similar nature provided by other competitors in the market.  Markets: By defining markets, the company is declaring which types of customers it will target. Or who will be the intended audience for which it will produce products or services. For example, a luxury car maker like Rolls Royce has a potential market of only the richest of the rich in the world.  Technology: By defining technology, the company tells its current technology use in making of its products. It also tells about the unique ways in which its products or services are technologically more advanced than their alternates.  Concern for survival, growth and profitability: In this element of the mission statement business defines the means it seeks to survive in the longer run. It not merely lists them out but also defines the logic behind them and how will the company strive to achieve them.  Philosophy: Philosophy of a company is a much wider term to cover. By defining philosophy, the company defines its way of working, its culture, its beliefs and how it sees work to be carried out. It is also an analytical way of defining the norms on which it runs.  Self-concept: By defining the self-concept, the business is telling its heart out to the world. In this the company shows the outside world, its core strengths and the place it sees itself in the future. Department of Finance

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Strategic Management  Concern for public image: The buzz word is usually corporate social responsibility mixed with concern for public image. First of all these two terms are totally different and they can by no means be intermingled with each other. Corporate social responsibility points the ways in which the business wants to contribute towards the betterment of the society. Concern for public image is a much wider term and can include not only the corporate social responsibility but the overall impact of the actions taken by the company on its image. This may include from minor issues like installing manufacturing recycling plants by a company for pollution reduction to improve its packaging to enhance a better brand image for one of its top line brands.  Concern for employees: Earlier day corporations didn't care much about their employees. Thankfully the trend has started shifting from no focus to a lot of concentration on working environment. In a mission statement a company also defines the ways in which it is beneficial for potential and currently working employees to work at a certain organization. This also includes the ways in which the company will treat its employees and how will it look towards this relation in a longer period of time. The ultimate aim of any investor is to get returns by investing in stocks. While the end result is obviously important, what is more important is to get the process right; the process of picking the right stocks which will ensure that the possibility of you losing your money is reduced considerably. And one of the first steps towards this is to understand the industry you want to invest in. Understanding the industry in which a company operates provides an essential framework for the analysis of the individual company. External analysis: External analysis identifies strategic opportunities and threats that exist in three components of the external environment: the specific industry environment within which the organization is based, the country or national environment and the macro environment. Internal analysis: Internal analysis identifies the strengths and weaknesses of the organization. This involves identifying the quantity and quality of an organization’s resources. SWOT analysis: Together, the external and internal analyses result in a SWOT analysis, delineating a firm’s strengths, weaknesses, opportunities, and threats. The SWOT analysis is then used to create a business model to achieve competitive advantage, by identifying strategies that align, fit, or match a company’s resources to the demands of the environment. This model is called a fit model. SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the business and its environment. Its key purpose is to identify the strategies that will create a firm specific business model that will best align an organization’s resources and capabilities to the requirements of the environment in which the firm operates. In other words, it is the foundation for evaluating the internal potential and limitations and the probable/likely opportunities and threats from the external environment. It views all positive and negative factors inside and outside the firm that Department of Finance

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Strategic Management affect the success. A consistent study of the environment in which the firm operates helps in forecasting/predicting the changing trends and also helps in including them in the decision-making process of the organization. An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s mission. These are the basis on which continued success can be made and continued/sustained. Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give your organization its consistency. Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty. Examples of organizational strengths are huge financial resources, broad product line, no debt, committed employees, etc. 2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full potential. These weaknesses deteriorate influences on the organizational success and growth. Weaknesses are the factors which do not meet the standards we feel they should meet. Weaknesses in an organization may be depreciating machinery, insufficient research and development facilities, narrow product range, poor decision-making, etc. Weaknesses are controllable. They must be minimized and eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased. Other examples of organizational weaknesses are huge debts, high employee turnover, complex decision making process, narrow product range, large wastage of raw materials, etc.

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Strategic Management 3. Opportunities - Opportunities are presented by the environment within which our organization operates. These arise when an organization can take benefit of conditions in its environment to plan and execute strategies that enable it to become more profitable. Organizations can gain competitive advantage by making use of opportunities. Organization should be careful and recognize the opportunities and grasp them whenever they arise. Selecting the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise from market, competition, industry/government and technology. Increasing demand for telecommunications accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with existing firms for revenue. 4. Threats - Threats arise when conditions in external environment jeopardize the reliability and profitability of the organization’s business. They compound the vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be at stake. Examples of threats are - unrest among employees; ever changing technology; increasing competition leading to excess capacity, price wars and reducing industry profits; etc. Advantages of SWOT Analysis SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great subjective element. It is best when used as a guide, and not as a prescription. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than its competitors. SWOT Analysis helps in strategic planning in following mannera. b. c. d. e. f. g. h.

It is a source of information for strategic planning. Builds organization’s strengths. Reverse its weaknesses. Maximize its response to opportunities. Overcome organization’s threats. It helps in identifying core competencies of the firm. It helps in setting of objectives for strategic planning. It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities with the competitive environment in which the firm operates.

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Strategic Management SWOT ANALYSIS FRAMEWORK

Limitations of SWOT Analysis SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because of which the organizations might overlook certain key strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as there is great degree of uncertainty in market. SWOT Analysis does stress upon the significance of these four aspects, but it does not tell how an organization can identify these aspects for itself. There are certain limitations of SWOT Analysis which are not in control of management. These includea. b. c. d. e.

Price increase; Inputs/raw materials; Government legislation; Economic environment; Searching a new market for the product which is not having overseas market due to import restrictions; etc.

Strategic choice: Strategic choice involves generating a series of strategic alternatives, based on the firm’s mission, values, goals, and SWOT analysis, and then choosing those strategies that achieve the best fit. Organizations identify the best strategies at the functional, business, global, and corporate levels. 1.

Functional-level strategy is directed at improving the effectiveness of functional operations within a company, such as manufacturing, marketing, materials management, research and development, and human resources.

2.

The business-level strategy of a company encompasses the overall competitive theme that a company chooses to stress, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings.

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Strategic Management 3.

More and more, to achieve a competitive advantage and maximize performance, a company has to expand its operations outside the home country. Global strategy addresses how to expand operations outside the home country.

4.

Corporate-level strategy must answer this question: What businesses should we be in to maximize the long-run profitability of the organization? The answer may involve vertical integration, diversification, strategic alliances, acquisition, new ventures, or some combination thereof.

Strategy implementation: Strategy implementation consists of a consideration of corporate governance and business ethics, as well as actions that should be taken, for companies that compete in a single industry and companies that compete in more than one industry or country. Strategy implementation is the translation of chosen strategy into organizational action so as to achieve strategic goals and objectives. Strategy implementation is also defined as the manner in which an organization should develop, utilize, and amalgamate organizational structure, control systems, and culture to follow strategies that lead to competitive advantage and a better performance. Organizational structure allocates special value developing tasks and roles to the employees and states how these tasks and roles can be correlated so as maximize efficiency, quality, and customer satisfaction-the pillars of competitive advantage. But, organizational structure is not sufficient in itself to motivate the employees. An organizational control system is also required. This control system equips managers with motivational incentives for employees as well as feedback on employees and organizational performance. Organizational culture refers to the specialized collection of values, attitudes, norms and beliefs shared by organizational members and groups. Following are the main steps in implementing a strategy:       

Developing an organization having potential of carrying out strategy successfully. Disbursement of abundant resources to strategy-essential activities. Creating strategy-encouraging policies. Employing best policies and programs for constant improvement. Linking reward structure to accomplishment of results. Linking reward structure to accomplishment of results. Making use of strategic leadership.

Excellently formulated strategies will fail if they are not properly implemented. Also, it is essential to note that strategy implementation is not possible unless there is stability between strategy and each organizational dimension such as organizational structure, reward structure, resource-allocation process, etc. Strategy implementation poses a threat to many managers and employees in an organization. New power relationships are predicted and achieved. New groups (formal as well as informal) are formed whose values, attitudes, beliefs and concerns may not be known. With the change in power and status roles, the managers and employees may employ confrontation behavior.

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Strategic Management Strategic Decisions A strategic decision simply refers to the long term service and direction of an organization. However, it can also be redefined as the long term scope of an organization towards achieving competitive advantage through the configuration of resources. Strategic decisions are the decisions that are concerned with whole environment in which the firm operates the entire resources and the people who form the company and the interface between the two. Strategic decisions determine the grand direction upon which an entity will embark. Always, strategy precedes action. The object of strategy is to bring about advantageous conditions within which action will occur. Characteristics/Features of Strategic Decisions a. Strategic decisions have major resource propositions for an organization. These decisions may be concerned with possessing new resources, organizing others or reallocating others. b. Strategic decisions deal with harmonizing organizational resource capabilities with the threats and opportunities. c. Strategic decisions deal with the range of organizational activities. It is all about what they want the organization to be like and to be about. d. Strategic decisions involve a change of major kind since an organization operates in ever-changing environment. e. Strategic decisions are complex in nature. f.

Strategic decisions are at the top most level, are uncertain as they deal with the future, and involve a lot of risk.

g. Strategic decisions are different from administrative and operational decisions. Administrative decisions are routine decisions which help or rather facilitate strategic decisions or operational decisions. Operational decisions are technical decisions which help execution of strategic decisions. To reduce cost is a strategic decision which is achieved through operational decision of reducing the number of employees and how we carry out these reductions will be administrative decision. The differences between Strategic, Administrative and Operational decisions can be summarized as followsStrategic Decisions Strategic decisions are long-term decisions. These are considered where The future planning is concerned. Strategic decisions are taken in Accordance with organizational mission and vision. These are related to overall Counter planning of all Organization. These deal with organizational Growth.

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Administrative Decisions Administrative decisions are taken daily. These are short-term based Decisions. These are taken according to strategic and operational Decisions. These are related to working of employees in an Organization. These are in welfare of employees working in an organization.

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Operational Decisions Operational decisions are not frequently taken. These are medium-period based decisions. These are taken in accordance with strategic and administrative decision. These are related to production. These are related to production and factory growth.

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Strategic Management Issues in the Strategic decision making There are many factors which are considered or kept in mind while framing out various Strategies on which the business should proceed, so as to achieve all the predefined targets and organizational goals. However there are some issues or difficulties that arise due to the process of framing of the organizational strategies:  A company would have different people in decision making at different periods of time. Decision often require judgments and thus is important to note that the person related factors are important in decision making and the decision make differ as that person changes.  Again an individual does not take decisions alone. But often there is rumble in decisions, which could be between individual and group decision making. The decision taken by the group could be different from those that may be taken by the individual themselves.  The company would need to decide on what criteria it should make its decision. Thus it need a process of objective setting, which serve as benchmarks for evaluation of the efficiency and effectiveness of the decision making process. There are three major criteria in decision making- the concept of maximization, - the concept of satisfying, the concept of instrumentalism. Based on the chosen concept, Strategic decisions will differ.  It is assumed that decision making is logical and thus there will be rationality in the decision making. In the context of Strategic decision making, it means that there would be a proper evaluation and then exercising a choice from among various alternative courses of action in such a way that it may lead to the achievement of the objectives in the best possible manner.  As the situations are complex, straightforward thinking may not be effective. Creativity in decision making may be needed, thus the decision must be original and different. But also based on situation and circumstances there could be variability in decision making. Role of the Strategist in framing the Company’s Strategies: There senior management is involved in the Strategic management. The role of different team players in the senior management can be described as follows: 1. Role of Boards of Directors: They are the supreme authority in a company, who represent the owners/shareholders and sometimes lenders. They are supposed to direct and are responsible for the governance of the company. The Companies Act and other laws also bind them their actions. The board though is supposed only to direct, they do get involved in a lot of operational issues also. Professionals on the Board of Directors help to get new perspectives and provide guidance. They are the link between the company and the environment. 2.

Role of the Chief Executive Officer: He is the most important strategist and responsible for all aspects right from formulation/implementation to review of strategic management. The CEO is the chief architect of the organizational purpose. He is the supreme leader, builder, motivator and mentor. CEO is the link between the company and the Board of Directors and is also responsible for managing external environment and relationships.

3. Role of Entrepreneurs: They are the ones who start new businesses and hence are independent in thought and actions. Often even internally, a company can promote Department of Finance

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Strategic Management entrepreneurial spirit. The entrepreneurs often provide a sense of direction and are active in implementation. 4. Role of Senior Management: They would either look after strategic management as responsible for certain areas or as a part of the team will work upon planning those strategies. They are answerable to the Board of Directors and the CEO. 5. Role of SBU level Executives: They would be more focused on their product line/business and also on co-ordination with the other SBU and with other senior management. They would be more in the implementation role. 6. Role of the Corporate Planning staff: They would normally provide administrative support, tools and techniques and be a co-ordination function of the strategy planning team. 7. Role of Consultant: Consultants may be hired for a specialized new business or expertise or even to get an unbiased opinion on the business and the strategy. 8. Role of the Middle Level Managers: They are the vital links in planning strategies and implementation. Though they are not actively involved in formulation of strategies but are often developed to be the future top management. Dimensions of Strategic Decision Decision making is a managerial process and it is a function of choosing a particular course of action out of several alternative courses for the purpose of achieving organization’s objectives and goals. Decisions may relate to general day to day operations, can be major or minor. They may also be strategic in nature. Strategic decisions are different in nature than all other decisions which are taken at various levels of the organization during day-to day working of the organizations. The major dimensions of strategic decisions are:  Strategic decisions require top-management involvement: Strategic decisions involve thinking in totality of the organizations and also there is lot of risk involved. Hence, problems calling for strategic decisions require to be considered by top management.  Strategic decisions involve the allocation of large amounts of company resources: It may require huge financial investment to venture into a new area of business or the organization may require huge number of manpower with new set of skills in them.  Strategic decisions are likely to have a significant impact on the long term prosperity of the firm: Generally the results of strategic implementation are seen on a long term basis and not immediately.  Strategic decisions are future oriented: Strategic thinking involves predicting the future environmental conditions and how to orient for the changed conditions.  Strategic decisions usually have major multifunctional or multi-business consequence: As they involve organization in totality they affect different sections of the organization with varying degree.  Strategic decisions necessitate consideration of factors in the firm’s external environment: Strategic focus in organization involves orienting its internal environment to the changes of external environment.

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Strategic Management The Five-Step strategic Decision Making Process Identifying/clarifying the decision to be made: If the decision has not yet been isolated, it should be identified as a first step. Sometimes the decision to be made will have been presented to the decision maker. In those situations, Step 1 calls for the clarification of what the decision actually entails. Identifying possible decision options: The next step requires the decision maker to spell out, as clearly as possible, just what the decision alternatives really are. For instance, if one were attempting to buy a bicycle, do the decision options only consist of the different types of bicycles, or is another option to refrain from buying a bicycle altogether? Gathering/processing information: Next, the decision maker collects or processes information that can help guide the decision. If such information is already at hand, then it simply needs to be processed; that is, studied and understood by the decision maker. If there is no relevant information available, or if there is insufficient information, then such information must be collected so it can be processed. The more significant the decision, the more rigorous the information-gathering process. Making/implementing the decision: After the information has been considered according to its relevance and significance, a decision based on that information should be made and, thereafter, implemented. Evaluating the decision: In recognition of the fact that not all of one's decisions are likely to be defensible, the final step in the five-step decision making process is to determine whether the decision was appropriate. Ordinarily, this will be done by ascertaining the decision's consequences.

Strategic Leadership Strategic leadership refers to a manger’s potential to express a strategic vision for the organization, or a part of the organization, and to motivate and persuade others to acquire that vision. Strategic leadership can also be defined as utilizing strategy in the management of employees. It is the potential to influence organizational members and to execute organizational change. Strategic leaders create organizational structure, allocate resources and express strategic vision. Strategic leaders work in an ambiguous environment on very difficult issues that influence and are influenced by occasions and organizations external to their own. The main objective of strategic leadership is strategic productivity. Another aim of strategic leadership is to develop an environment in which employees forecast the organization’s needs in context of their own job. Strategic leaders encourage the employees in an organization to follow their own ideas. Strategic leaders make greater use of reward and incentive system for encouraging productive and quality employees to show much better performance for their organization. Functional strategic leadership is about inventiveness, perception, and planning to assist an individual in realizing his objectives and goals. Strategic leadership requires the potential to foresee and comprehend the work environment. It requires objectivity and potential to look at the broader picture. A few main traits / characteristics / features / qualities of effective strategic leaders that do lead to superior performance are as follows:

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Strategic Management  Loyalty- Powerful and effective leaders demonstrate their loyalty to their vision by their words and actions.  Keeping them updated- Efficient and effective leaders keep themselves updated about what is happening within their organization. They have various formal and informal sources of information in the organization.  Judicious use of power- Strategic leaders makes a very wise use of their power. They must play the power game skillfully and try to develop consent for their ideas rather than forcing their ideas upon others. They must push their ideas gradually.  Have wider perspective/outlook- Strategic leaders just don’t have skills in their narrow specialty but they have a little knowledge about a lot of things.  Compassion- Strategic leaders must understand the views and feelings of their subordinates, and make decisions after considering them.  Motivation- Strategic leaders must have a zeal for work that goes beyond money and power and also they should have an inclination to achieve goals with energy and determination.  Self-control- Strategic leaders must have the potential to control distracting/disturbing moods and desires, i.e., they must think before acting.  Social skills- Strategic leaders must be friendly and social.  Self-awareness- Strategic leaders must have the potential to understand their own moods and emotions, as well as their impact on others.  Readiness to delegate and authorize- Effective leaders are proficient at delegation. They are well aware of the fact that delegation will avoid overloading of responsibilities on the leaders. They also recognize the fact that authorizing the subordinates to make decisions will motivate them a lot.  Articulacy- Strong leaders are articulate enough to communicate the vision(vision of where the organization should head) to the organizational members in terms that boost those members.  Constancy/ Reliability- Strategic leaders constantly convey their vision until it becomes a component of organizational culture. To conclude, Strategic leaders can create vision, express vision, passionately possess vision and persistently drive it to accomplishment.

Ansoff’s paradigm: a) There is no universal success formula for all firms. b) The level of turbulence determines the strategy. c) To optimize firms’ success the aggressiveness of strategy should be aligned with the turbulence. d) The management’s capabilities should be aligned with the turbulence to optimize firm success. e) Internal capability variables – cognitive, psychological, political, anthropological and sociological variables, all jointly determines the firm’s success. Avoiding the Implementation pitfalls Because you want your plan to succeed, heed the advice here and stay away from the pitfalls of implementing your strategic plan. Here are the most common reasons strategic plans fail: 

Lack of ownership: The most common reason a plan fails is lack of ownership. If people don’t have a stake and responsibility in the plan, it’ll be business as usual for all but a frustrated few.

Lack of communication: The plan doesn’t get communicated to employees, and they don’t understand how they contribute.

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Strategic Management 

Getting mired in the day-to-day: Owners and managers, consumed by daily operating problems, lose sight of long-term goals. _ Out of the ordinary: The plan is treated as something separate and removed from the management process.

An overwhelming plan: The goals and actions generated in the strategic planning session are too numerous because the team failed to make tough choices to eliminate non-critical actions. Employees don’t know where to begin.

A meaningless plan: The vision, mission, and value statements are viewed as fluff and not supported by actions or don’t have employee buy-in.

Annual strategy: Strategy is only discussed at yearly weekend retreats. _ Not considering implementation: Implementation isn’t discussed in the strategic planning process. The planning document is seen as an end in itself.

No progress report: There’s no method to track progress, and the plan only measures what’s easy, not what’s important. No one feels any forward momentum.

No accountability: Accountability and high visibility help drive change. This means that each measure, objective, data source, and initiative must have an owner.

Lack of empowerment: Although accountability may provide strong motivation for improving performance, employees must also have the authority, responsibility, and tools necessary to impact relevant measures. Otherwise, they may resist involvement and ownership. It’s easier to avoid pitfalls when they’re clearly identified. Now that you know what they are, you’re more likely to jump right over them!

Strategic Implementation Steps There are countless books and papers on the subject of strategic planning. The best strategy in the world, however, becomes pointless if it is not implemented properly. Although every organization and every plan is different, there are some common factors that must be accounted for and steps that must be followed by management in order to align the organizational system with the strategic mission. 

Defining Tasks and Activities: Before actual implementation can begin, key implementation tasks and activities must be defined in detail. An improperly formulated strategic decision can fail even if the strategy itself is good and even if no effort is spared in its implementation. There is a fine balance that must be achieved on the level of detail, as a plan that is too vague will not provide useful guidance, while a plan that is too detailed may lack flexibility. Securing the Required Resources: Once key tasks have been identified, the resources required for their execution must be identified and secured. Money is an important resource, but by no means the only one. The implementation of projects may also fail because of a lack of manpower or technical expertise. If appropriate resources cannot be secured and developed -- for example, by providing training in the required skills -- the plan must be redefined or its scope limited. Seeking Participation and Commitment: The success of any plan is likely to be limited if the involved personnel is not committed to the project. Managers and employees should be involved from the start in the strategy formulation process, not only in order to develop a sense of ownership but also for the importance of their insights. Plans formulated by top management are almost always guaranteed to have major flaws if employees and affected groups do not provide a reality check based on their knowledge of the organization's day-to-day operations. Creating Communication Structures: Closely related but not equal to commitment-building, the creation of two-way communication channels must form part of the implementation strategy from the beginning. In the early stages of the project it will allow the affected employees to provide their input about the formulated strategy and its potential issues. In later stages of the implementation those channels will ensure that unforeseen problems are communicated to top management in time to act and adapt the plans. Assigning Roles and Responsibilities: Most successful implementations are propelled forward by a formally appointed champion who will provide both leadership and accountability. Roles and responsibilities are often assigned in a framework of projects and programs, with long-term, open-ended programs providing a bridge between strategy and concrete projects. For strategies where disruptive change is required, strategic teams are often formed outside of the existing structures and hierarchies, as management and personnel used to the current way of doing business may have some reticence to alter the status quo.

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Strategic Management I/O model The I/O or Industrial Company model adopts an external perspective. It starts with an assumption that forces external to the company represent the dominant influences on a company's strategic actions. In other words, this model presumes that the characteristics of and conditions present in the external environment determine the appropriateness of strategies that are formulated and implemented in order for a company to earn above-average returns. In short, the I/O model specifies that the choice of industries in which to compete has more influence on company performance than the decisions made by managers inside their firm. The I/O model was a dominant paradigm from the 1960s through the 1980s. According to this model companies must pay careful attention to the characteristics of the industry in which they choose to compete, searching for one that is the most attractive to the firm, given the company's strategically relevant resources. Then the company must be able to successfully implement strategies required by the industry's characteristics to be able to increase their level of competitiveness. The five forces model is an analytical tool used to address and describe these industry characteristics.

External Environment: General Environment, Industry environment, Competitive Environment

Attractive Industry: An Inductry whose structural characteristics suggest above-average return are possible

Strategy formulation: selection of a strategy linked with above-average returns in a particular industry

Assets and Skills: Assets and skills required to implement a chosen strategy.

Strategy Implementation: Selection of strategic actions linked with effective implementation of the chosen strategy. Figure: Five step Process of the I/O Model Based on its underlying assumptions, the I/O model prescribes a five-step process for companies to achieve above-average returns as shown in the figure above: ďƒ˜

Study the external environment-general, industry and competitive-to determine the characteristics of the external environment that will both determine and constrain the company's strategic alternatives.

ďƒ˜

Select an industry (or industries) with a high potential for returns based on the structural characteristics of the industry.

ďƒ˜

Based on the characteristics of the industry, in which the company chooses to compete, strategies that are linked with above-average returns should be selected. A model or framework that can be used to assess the requirements and risks of these strategies, the Generic Strategies (cost leadership and differentiation), will be discussed in detail later.

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Strategic Management

ďƒ˜

Acquire or develop the critical resources-skills and assets-needed to successfully implement the strategy that has been selected.

ďƒ˜

The I/O model indicates that above-average returns will accrue to companies that successfully implement relevant strategic actions that enable the company to leverage its strengths (skills and resources) to meet the demands or pressures and constraints of the industry in which they have elected to compete.

The I/O model has been supported by research indicating 20% of company profitability can be explained by industry characteristics and 36% of company profitability can be attributed to company characteristics and the actions taken by the company. Overall, this indicates a reciprocal relationship-or even an interrelationship-between industry characteristics (attractiveness) and company strategies that result in company performance.

GOAL A goal is a specific target, an end result or something to be desired. It is a major step in achieving the vision of the organization. A goal can be defined as a future state that an organization or individual strives to achieve. For each goal that an organization sets, it also sets objectives. A goal is where you want to be, a destination. Goals are broader than objectives. They are based on ideas and do not have a thorough set of plans attached to them. Goals are broad and have generic actions. They may not be measureable, tangible or have a timeframe attached to them. Goals are usually long term. In the planning context a goal is a place where the organization wants to be, in other words a destination. For example, a goal for a sporting organization might be to have 50 qualified and active coaches. An organization may set several goals that will outline a path to achieving the vision. The goal of attaining 50 qualified and active coaches will be an important step in achieving the vision of becoming most dynamic, most respected and best achieved club in the district league.

OBJECTIVES An objective is a short-term target with measurable results. An objective is the direction you have to take to get to your destination. A measure of change in order to bring about the achievement of the goal. The attainment of each goal may require a number of objectives to be. Objectives are much more in depth than goals. They are like a set of blueprints to achieve our goals. Objectives are narrow and identify the tasks needed to achieve them. They are measurable and tangible and have a short to medium timeframe. Objectives are based on plans and actions that are intended to attain or accomplish a goal. Examples "To serve 300 students in Fiscal Year 2010.""We will develop an effective training manual, methods, and materials for paid instructors and volunteers.""90% of shelter guests will receive one-onone case management services." There is often much confusion between goals and objectives. Whereas as a goal is a description of a destination, an objective is a measure of the progress that is needed to get to the destination. The following table serves to illustrate the difference between goals and objectives.

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Strategic Management Difference between goals and objectives Example Goal

Example Objective

50 qualified and active coaches

Increase qualified/active December 2005

Membership base of 500 persons

Increase membership by 25% by December 2005

Profile in the community as a club of excellence in health and safety

Reduce incidences of injury on the field by 50% by December 2005

Achieve financial independence

Increase sponsorship by 100% by December 2005

coaches

by

50%

by

It is important to understand that a number of goals must be attained before the strategic plan can be achieved. Similarly, each goal in the strategic plan will in turn require a number of objectives to be successfully achieved. The figure opposite is a simple illustration showing that each of six goals has two objectives. In reality, the number of objectives needed for each goal can be anything but the usual range is 1 to 6.

The strategies for goals and objectives too are different in any business organization. To put it in a nutshell, the main strategy of a goal is the set various objectives to attain the goal. And a strategy of objectives implies the marketing and advertising campaigns that are planned to attain the different objectives. Although goals and objectives are loosely interchangeable terms, objectives become the subsets of a business organizations main goal. So the strategies also differ accordingly. Goals and objectives provide organizations with a blueprint that determines a course of action and aids them in preparing for future changes. Without clearly-defined goals and objectives, organizations will have trouble coordinating activities and forecasting future events. Four Basic Functions of Organizational Goals (According to Barney and Griffin) 1. Provide guidance and direction, 2. Facilitate planning, 3. Motivate and inspire employees, and 4. Help organizations evaluate and control performance. Organizational goals inform employees where the organization is going and how it plans to get there. When employees need to make difficult decisions, they can refer to the organization's goals for guidance. Goals promote planning to determine how goals will be achieved. Employees often set goals in order to satisfy a need; thus, goals can be motivational and increase performance. Evaluation and control allows an organization to compare its actual performance to its goals and then make any necessary adjustments.

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Strategic Management Characteristics of Objectives Objectives are an organizational target which efforts are directed within a specific time frame. It is a statement of what is to be achieved within a given time frame. It is the desired end result towards which all activities in an organization are aimed at. The Characteristics of Objectives are; Specific: Being specific is one of the Characteristics of the above Objectives. Managers should develop clear and well defined objectives indicating what should be accomplished, who should do it and within which time frame i.e. specific objectives eliminate confusion and ensure that members understand. Achievable: Another characteristic of the above mentioned Objectives is being achievable. This means that objectives should be within the capability of the organization i.e. shouldn't be too high nor too low to achieve. Challenging: Being challenging is another characteristic of the above Objectives. This will stimulate high standards of performance and encourages progress. Flexible: Flexibility is another characteristic of these Objectives. This will enable the organization be able to modify as needed. Measurable: Being measurable is yet another characteristic of these Objectives. They should be measurable so as to evaluate their attainability by the organization. Integrative: Being integrative is another of the Characteristics of these Objectives. It applies to both short and long run objectives i.e. the short term and long term objectives should be consistent and supportive of one another. They also must be integrated with the reward system of the business so that it can provide the employee with a means of realizing both personal and business objective Consistent: One of the Characteristics of these Objectives is that the objectives should be consistent with the values of the organization to avoid conflict with one another and should be compatible with other departmental objectives. Cost effective: Cost effectiveness is another of the Characteristics of the above mentioned Objectives. Objectives should be economical in the use of resources so that they blend in with the budget of the company. Reviewable: One of the Characteristics of High Quality Objectives is that they must be reviewable. There must be a period review of objectives. Management should also realize that planning is subject to certain regulation and should be revised from time to time. Time bound: Last but not least of the Characteristics of High Quality Objectives is that objectives must be time related or bound. This means that they must be achieved within a definite stated time period.

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Strategic Management

Chapter- 2 External Analysis

Overview: For a company to succeed, its strategy must either fit the industry environment in which it operates, or the company must be able to reshape the industry environment in which it operates to its advantage through its choice of strategy. Companies typically fail when their strategy no longer fits the environment in which they operate. To achieve a good fit, managers must understand the forces that shape competition in their external environment. This understanding enables them to identify strategic opportunities and threats. Opportunities arise when a company can take advantage of conditions in its environment to formulate and implement strategies that enable it to become more profitable. Threats arise when conditions in the external environment endanger the integrity and profitability of the company’s business.

Defining an Industry: An industry can be defined as a group of companies offering products or services that are close substitutes for each other. Close substitutes are products or services that satisfy the same basic consumer need. Firms within the same industry are rivals, also called competitors. 1.

A correct industry definition can be the difference between success and failure.

2.

Managers must define industries based on the customer need (the demand side of the market) and not the products the industry offers (the supply side of the market).

Characteristics of an Industry: 1. Within industries, customers with a common need group together to form a market segment. For example, the soft drink industry contains regular, diet, and caffeine-free market segments. 2. Industry boundaries are not fixed, but can change over time. Industries may fragment into a set of smaller industries, such as when the auto industry fragmented into the car and SUV industries. Industries may also consolidate, such as the blurring of the boundary between the handheld computer and cell phone industries.

Defining Sector:

Several industries combine to create a sector. For example, the PC industry, the handheld industry, and the mainframe industry together create the computer sector. Department of Finance

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Porter’s Five Forces Model: This model was devised by Michael Porter to describe forces that shape competition within an industry and help to identify strategic opportunities and threats. The stronger each of these forces is, the more established companies are limited in their ability to raise prices and earn greater profits. A strong competitive force is a threat because it depresses profits. A weak competitive force is an opportunity because it allows the company to earn greater returns.

Figure 2.2: Porter’s Five Forces Model 1. Risk of entry by potential competitors: One of Porter’s Five Forces is the risk of entry by potential competitors. Potential competitors are companies that are currently not competing in the industry but have the capability to do so. New entry into an industry expands supply. This in turn depresses prices and profits. Thus a high risk of new entry constitutes a strategic threat. A low risk of new entry allows established companies to raise their prices, so it constitutes an opportunity. The risk of entry by potential competitors is a function of the height of barriers to entry. 2. Rivalry: Another of Porter’s Five Forces is rivalry among established companies. Strong rivalry tends to lower prices and raise costs, which constitutes a threat to established companies, whereas weak rivalry creates an opportunity to earn greater returns. 3. The bargaining power of buyers: A third factor in Porter’s Five Forces Model is the bargaining power of buyers. Buyers can be individual consumers, other businesses, wholesalers, or retailers. Buyers can be viewed as a competitive threat when they force down prices or when they raise expenses by demanding higher quality and better service. The ability of buyers to make demands on a company depends on their power relative to that of the company 4. The bargaining power of suppliers: A fourth factor is the bargaining power of suppliers. Suppliers are any organization that supplies materials, services, or labor (such as labor unions) to the company. Suppliers are a threat when they Department of Finance

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Strategic Management are able to force up the price the company must pay for inputs or to reduce the quality of goods supplied. The ability of suppliers to make demands on a company depends on their power relative to that of the company 5. Substitute products: A fifth factor is the threat of substitute products. The existence of adequate substitute products limit the price that companies in an industry can charge without losing their customers to makers of substitutes. Recently, Intel CEO Andy Grove proposed a sixth force: complementors, or companies that sell products that are used in addition to and along with the enterprise’s own products. When there is a weak supply of complementary products, demand in the industry will be weak, and revenues and profits will be low.

What are the exit barriers of an industry?

Exit barriers are a serious competitive threat, especially when demand is declining. Economic, strategic, and emotional factors can keep companies competing in an industry even when returns are low. This in turn leads to excess capacity and price wars. Exit barriers include: a.

Investments in specialized assets

b.

High fixed costs of exit such as severance pay

c.

Emotional attachments to an industry

d.

Economic dependence on a single industry

e.

The need to maintain expensive assets in order to compete effectively in that industry.

By which factors the height of barriers to entry is determined? The height of barriers to entry is determined by several factors.

a. The extent to which established companies have brand loyalty from their customers is one factor. Loyal customers would discourage potential competitors. b. Potential competitors are also discouraged when established companies enjoy an absolute cost advantage over potential entrants. Cost advantages might include factors such as patents, control of a specific raw material, or access to cheaper funds. c. Potential competitors are also discouraged when established companies have economies of scale, that is, when established companies are able to produce at a lower cost than the new entrants due to their larger size and greater experience. d. When customer switching costs, that is costs that accrue to a consumer that intends to switch from the product offering of an established company to the product offering of a new entrant, are high, potential new entrants are discouraged. Department of Finance

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Strategic Management

e. Government regulation, such as establishing a protected monopoly, tends to protect established firms, and thus to constitute a barrier to entry. When industries are deregulated, new entrants usually proliferate.

On which factors the extent of rivalry among established firms depends? The extent of rivalry among established firms depends on several factors.

1. Industry Competitive Structure: One factor is industry competitive structure, which refers to the number and size distribution of companies within an industry. Structures vary from fragmented (made up of many small- and medium-sized companies) to consolidate (dominated by a small number of large companies). Different competitive structures have different implications for rivalry. a.

Many fragmented industries are characterized by low entry barriers and commodity-type-products that are hard to differentiate. These characteristics tend to result in boom-and-bust cycles, with a flood of new entrants, excess capacity, and price wars, leading to low industry profits and exit from the industry. The more commoditieslike an industry’s product, the more vicious will be the price war. The “bust� part of the cycle will continue until overall industry capacity is brought into line with demand (through bankruptcies), at which point prices may stabilize again.

b.

Consolidated industries are interdependent, so that the competitive actions of one company directly affect the profitability of competitors, forcing a response from them. The consequence can be price wars like those the airline industry has experienced. Thus interdependence is a major threat. This threat can be reduced when tacit price-leadership agreements exist within the industry and when companies are successful in emphasizing nonprice competition.

2. Demand Conditions: Demand conditions also determine the intensity of rivalry among established companies. Growing demand moderates competition by providing room for expansion. Declining demand results in more competition as companies fight to maintain revenues and market share. 3. Exit Barriers: Exit barriers are a serious competitive threat, especially when demand is declining. Economic, strategic, and emotional factors can keep companies competing in an industry even when returns are low. This in turn leads to excess capacity and price wars.

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Strategic Management

When buyers tend to be powerful? Buyers tend to be powerful when: 4.

They are in industries that are more highly consolidated than the company’s industry

5.

They purchase in large quantities or constitute a significant buyer for that industry

6.

Buyers can easily switch to substitute product or an alternate supplier

7.

Buyers can readily produce the product themselves.

When Suppliers tend to be powerful? Suppliers tend to be powerful when: 8.

The supplier’s product has no substitutes or is vital to the company

9.

The company is not important to the supplier

10. The company has a switching cost to change suppliers 11. Suppliers can readily enter the company’s industry 12. The company cannot readily enter the supplier’s industry.

When threats of substitutes tend to be greater?

The threat of substitutes tends to be greater when: 13. The substitute is a close one, equally adequate in filling customer’s needs 14. The price of the substitute is equal to or less than the company’s products.

When the threats from a lack of complementors tend to be greater? The threat from a lack of complementors tends to be greater when: 15. Few complementary products exist. 16. The existing complementary products are not attractive to customers, due to high prices, inadequate features, and so on.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com http://jagannath.academia.edu/jony007ex

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Strategic Management Industry Life Cycle Analysis: Over time, industries pass through a series of well-defined stages with different implications for the nature of competition. Porter’s five competitive forces and competitive dynamics change as an industry evolves. Managers must learn to anticipate the changes that will occur as the industry develops over time.

Figure 2.4: Stages in the Industry Life Cycle 1. Embryonic stage: An embryonic industry is one that is just beginning to develop. Growth is slow because of buyer unfamiliarity with the industry’s products, poor distribution channels, and high prices stemming from the inability of companies to reap economies of scale.  Barriers to entry at this stage tend to be based on access to key technological know-how, rather than cost economies or brand loyalty. Rivalry in embryonic industries is based on educating customers, opening up distribution channels, and perfecting the design of the product.  Embryonic industries provide a good opportunity for firms to capture loyal customers, capitalizing on the lack of rivalry. 2. Growth stage: A growth industry is one where first-time demand is expanding rapidly as new consumers enter the marketplace. Typically, demand takes off when consumers become familiar with the product, prices fall with the attainment of economies of scale, and distribution channels develop.  During an industry’s growth stage, there tends to be little rivalry. Rapid growth in demand enables companies to expand their revenues and profits without taking market share away from competitors.  Growth industries provide opportunities for firms to expand their market share and revenues in a relatively low rivalry situation. Firms entering at this stage avoid the high expenses of initial product development.

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Strategic Management 3. Shake out stage: An industry shakeout occurs when the rate of industry growth slows down as demand approaches saturation levels. A saturated market is one where there are few first-time buyers left. Most of the demand is limited to replacement demand.  As an industry enters the shakeout stage, rivalry between companies becomes intense, with excess productive capacity and severe price discounting. Many firms exit the industry at this point.  Industry shakeout provides an opportunity for those firms that are dedicated to success in this particular industry to consolidate their power, often by acquiring the assets of firms exiting the industry. 4. Maturity stage: A mature industry is one where the market is totally saturated, growth is very low or near zero, and demand is limited to replacement demand. Most competitors have exited the industry, creating an oligopoly dominated by a few, large companies.  As an industry enters maturity, barriers to entry increase and the threat of entry from potential competitor’s decreases. Intense competition for market share can develop, driving down prices.  In mature industries, companies tend to recognize their interdependence and try to avoid price wars if possible. Stable demand gives them the opportunity to enter into price-leadership agreements, reducing the intensity of rivalry and allowing greater profitability. However, the stability of a mature industry is always threatened by further price wars, especially in an economic downturn. 5. Decline stage: In the decline stage, growth becomes negative. Virtually all companies exit the industry.  Depending on the speed of the decline and the height of exit barriers, competitive pressures can become as fierce as in the shakeout stage.  Falling demand leads to excess capacity, causing companies to engage in price wars. The greater the exit barriers, the harder it is for companies to reduce capacity and the greater is the threat of severe price competition.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com http://jagannath.academia.edu/jony007ex

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Strategic Management Limitations of Models for Industry Analysis: The Five Forces, strategic groups, and industry life cycle models constitute very useful ways of thinking about and analyzing the nature of competition within an industry. However, these models have limitations. It does not mean the models are useless. However, it does mean that managers must be aware of the limitations as they apply these models to their firms. 1. One important limitation of the life cycle model is that industry life cycles vary considerably, skipping or repeating stages, moving slowly or rapidly through the stages or remaining “stuck” at a particular stage. 2. Another limitation of all of these models is the lack of attention paid to the consequences of innovation. Over time, innovation in many industries competition leads to new products, processes, or strategies that can be very successful and transform the nature of competition within an industry. Innovation can fragment or consolidate an industry, create new strategic groups or market segments, speed or slow an industry’s life cycle, and otherwise disrupt the orderly predictions of all three of the models for industry analysis. 3. Another limitation of the models for internal analysis is the lack of attention paid to firm-specific factors. Studies point to enormous variance in the profit rates of individual companies within an industry, with industry effects accounting for only 10 to 20 percent of the variance. These studies suggest that the individual resources and capabilities of a company are far more important determinants of that company’s profitability than the industry or the strategic group of which the company is a member. The microenvironments: The microenvironments refer to the broader economic, technological, demographic, social, and political environment within which an industry is embedded. It is apparent that changes in this macro environment can have a direct impact on any one of the five forces in Porter’s model, thereby altering the relative strength of these forces and with it, the attractiveness of an industry.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com http://jagannath.academia.edu/jony007ex Department of Finance

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Strategic Management Forces of macro environments: There are five important forces in the macro environment which are shown in the figure.

Figure 2.7: The Role of the macro environment 17. Macroeconomic forces include changes in the growth rate of the economy, interest rates, currency exchange rates, and inflation rates; these are all major determinants of the overall level of demand. Adverse changes in any of these can threaten profitability in an industry, whereas positive changes tend to increase profitability. 18. Technological forces are characterized by an accelerated pace of innovation and change. Technological change can make established products obsolescent overnight, but at the same time; it can create new products and processes. Thus technological change is both an opportunity and a threat; it is creative and destructive. 19. Demographic forces consist of any trends related to population, such as the aging of the U.S. population and the movement of people across national boundaries. Changing demographics create both opportunities and threats, spawning new industries and products while eliminating others. 20. Social forces consist of changes in societal preferences and values. New social movements also create opportunities and threats. For example, the impact of the trend toward greater health consciousness has been a boon to the fitness equipment and organic foods industries, while it has hurt the beef and cigarette industries. 21. Political and legal forces are shaped by changing laws and regulations. Factors such as deregulation, insurance reform, and even the political party makeup of the Congress can create opportunities and threats for companies in many industries.

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Strategic Management

The Global and National Environments: The Globalization of Production and Markets: International trade and foreign direct investment have grown rapidly in the last few years, driven by lower tariffs and non-tariff barriers. This has led to the globalization of production and markets.

Why Globalization of production and markets has occurred? a.

The globalization of production has occurred, as firms are increasingly able to disperse parts of their production operations around the world, reducing costs.

b.

The globalization of markets has led to decreased emphasis on national markets, and increased focus on one huge global marketplace. The tastes and preferences of consumers in different nations are beginning to converge at some global norm.

Implications of globalization to managers: There are several implications of the globalization of products and markets that are important to managers. c.

Implications of the globalization of production and markets include the need for companies to recognize that industry boundaries do not stop at national borders, and competitors can be found in other national markets.

d.

Another implication is that competitive rivalry will increase as relatively protected national markets are transformed into segments of fragmented global industries where a large number of companies battle one another for market share and profits in country after country around the globe.

e.

A third implication is that the rate of innovation will continue to skyrocket, compressing product life cycles, and perhaps, reducing the importance of static models of external analysis, such as Porter’s Five Force Model or strategic groups.

f.

A final implication is that, in spite of the increased threats due to globalization, it has also created enormous opportunities. The decline in trade barriers has opened up many once-protected markets to companies based outside those markets.

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Strategic Management National Competitive Advantage: The national context of a country influences the competitiveness of companies based within that nation. Despite the globalization of production and markets, many of the most successful companies in certain industries are still clustered in a small number of countries. Individual companies need to understand the link between national context and competitive advantage in order to identify where their most significant competitors are likely to come from and to identify where they might want to locate certain productive activities. Attributes of national competitive advantage: In a study of national competitive advantage, Michael Porter identified four attributes of a national state that have an important impact upon the global competitiveness of companies located within that nation. Porter speaks of these four attributes as constituting the diamond. He argues that firms are most likely to succeed in industries or industry segments where conditions with regard to the four attributes are favorable. He also argues that the diamond’s attributes form a mutually reinforcing system in which the effect of one attribute is dependent on the state of others.

Figure 2.8: National Competitive Advantage 1. Factor endowments: One attribute is factor endowments, which include the cost and quality of factors of production. Factors of production include basic factors, such as land, labor, capital, and raw materials, along with advanced factors, such as technological know-how, managerial sophistication, and physical infrastructure (for example, roads, railways, and ports). Companies gain competitive advantage when their home countries are rich in factor endowments.

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Strategic Management 2. Local demand conditions: Another attribute is local demand conditions. Companies are typically most sensitive to the needs of their closest customers. Thus the characteristics of home demand are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality. Companies gain competitive advantage if their domestic consumers pressure them to meet high standards of product quality and to produce innovative products. 3. Competitiveness of related and supporting industries: A third attribute is the presence of related and supporting industries that are internationally competitive. The benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry, thereby helping it achieve a strong competitive position internationally. Successful industries within a country tend to be grouped into “clusters” of related industries. 4. Intensity of rivalry: A fourth attribute is the strategy, structure, and rivalry of companies within the nation. Different nations are characterized by different “management ideologies,” which either help them or do not help them to build national competitive advantage. Also, companies that experience a vigorous domestic rivalry look for ways to improve efficiency, which in turn makes them better international competitors. Domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced factors.

BCG Matrix Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment. According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share. Relative Market Share = SBU Sales this year leading competitors sales this year. Market Growth Rate = Industry sales this year - Industry Sales last year. The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership. BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBU’s are in same industry, the average growth rate of the Department of Finance

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Strategic Management industry is used. While, if all the SBU’s are located in different industries, then the midpoint is set at the growth rate for the economy. Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

10 x

1x Figure: BCG Matrix

0.1 x

1. Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures. 2. Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows lose their appeal and move towards deterioration, then a retrenchment policy may be pursued. 3. Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars. 4. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share Department of Finance

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Strategic Management only at the expense of competitor’s/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

Limitations of BCG Matrix The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. 2. Market is not clearly defined in this model. 3. High market share does not always leads to high profits. There are high costs also involved with high market share. 4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. 5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. 6. This four-celled approach is considered as to be too simplistic.

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Strategic Management

Chapter- 3 Internal Analysis

Overview: The choice of industry affects firm performance but, within any given industry, some companies are more profitable than others. Why do some companies do better than their competitors? What is the basis of competitive advantage? Internal analysis leads to the identification of a firm’s strengths and weakness, and especially its distinctive competencies, including its resources and capabilities. Distinctive competencies enable firms to create superior value for customers, by helping them to achieve the four main building blocks of competitive advantage: efficiency, quality, innovation, and responsiveness to customers. Superior value creation is driven by a firm’s ability to differentiate its products or reduce its expenses. When firms are able to create superior value, they experience higher profitability. It’s also important for firms to sustain their competitive advantages over time, to maintain their competitive advantage, and to take steps to avoid competitive failure.

Distinctive Competencies and Competitive Advantage: A company has a competitive advantage when its profit rate is higher than the average for its industry, and it has a sustained competitive advantage when it is able to maintain this high profit rate over a number of years. Competitive advantage derives from a firm’s distinctive competencies, which are of two types: resources and capabilities.

Types of distinctive competencies:

Distinctive competencies are of two types: resources and capabilities. 1. Resources refer to the financial, physical, human, technological, and organizational resources of the company. They can be divided into tangible resources, such as land, buildings, plant, and equipment; and intangible resources, such as brand names, reputation, patents, and technological or marketing knowledge. a.

Resources that are firm-specific and difficult to imitate are unique. Resources that create a strong demand for the firm’s products are valuable.

b.

Unique and valuable resources lead to a distinctive competency.

2. Capabilities refer to a company’s skills at coordinating its resources and putting them to productive use. Department of Finance

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Strategic Management c.

These skills reside in the way a company makes decisions and manages its internal processes

d.

Capabilities are, by definition, intangible. They reside not so much in individuals as in the way individuals interact, cooperate, and make decisions within the context of an organization.

Differentiate resources from capabilities The distinction between resources and capabilities is of the utmost importance in understanding the source of a distinctive competency. A company may have unique and valuable resources, but unless it has the capability to use those resources effectively, it may not be able to create or sustain a distinctive competency. Thus, unique and valuable resources are helpful in creating distinctive competencies, but capabilities are essential.

On what company’s profit depends on?

A company’s profit rate and hence competitive advantage is determined by the value customers place on the company’s goods or services, the price the company charges for the products or service, and the company’s costs of production. 1.

Value is assigned by customers based on product attributes such as performance, design, and quality. The more value a company creates, the more flexibility it has in assigning a price.

2.

The price a company charges is typically less than the value assigned by the consumer. The customer captures that difference in value as a consumer surplus, which occurs because the company is competing with other companies and so must charge a lower price than it could as a monopoly supplier.

3.

Another factor that causes the price to be lower than the value is the impossibility of segmenting the market so that the company can charge

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Strategic Management each customer a price that reflects that individual’s reservation price (their assessment of the value of a product).

Figure 3.3: Value Creation per Unit 4.

Looking at Figure 3.3, the company’s profit margin is equal to the difference between prices and costs (P–C), whereas the consumer surplus is equal to the difference between value and price (V–P). The company makes a profit so long as the price is greater than the cost. Its profit rate will be greater the lower costs are, relative to the price. The lower the competitive intensity, the greater the difference that can exist between price and value.

Figure 3.4: Value Creation and Pricing Options

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Strategic Management 5.

Looking at Figure 3.4, a company can create more value for its customers in two ways. a.

Under Option 1, a company can make the product more attractive, raising costs (C) but also raising value (V). Customers are then willing to pay a higher price (P increases).

b.

Under Option 2, a company can lower its price (P), creating a higher value (V), more demand, and increased volume of sales. Economies of scale realized because of the increased volume allow the company to reduce its costs (C).

Compare low cost with differentiations Low cost and differentiations are two basic strategies for creating value and attaining a competitive advantage in an industry. Competitive advantage (and higher profits) goes to those companies that can create superior value—and the way to create superior value is to drive down the cost structure of the business and/or differentiate the product in some way so that consumers value it more and are prepared to pay a premium price.

Figure 3.6: The Roots of Competitive Advantage

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Strategic Management

The Value Chain: A company’s value chain is a sequence of interrelated activities for transforming inputs into outputs that customer’s value. The process consists of a number of primary activities and support activities, each of which can add value to the product.

Figure 3.7: The Value Chain 1. Primary activities: Primary activities have to do with the design, creation and delivery of the product, its marketing, and with its support and after-sales service. There are four primary activities: research and development, production, marketing and sales, and service. a.

Research and development (R&D) is concerned with the design of products and production processes. R&D occurs in manufacturing enterprises as well as service companies. By superior product design, R&D can develop superior product designs, which increase the functionality of products, making them more attractive to consumers. Alternatively, R&D may develop more efficient production processes, lowering costs.

b.

Production is concerned with the creation of a good or service. For physical products, production means manufacturing. For services, production takes place when the service is actually delivered to the customer. The production function creates value by performing its activities efficiently so that lower costs result. Production can also create value by performing its activities in a way that is consistent with high product quality, which leads to differentiation and lower costs.

c.

Marketing and sales functions create value through brand positioning and advertising, which increase the perceived product value. They also create value by discovering consumer needs and communicating them to the R&D function of the company, which can then design products that better match those needs.

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d.

The role of the customer service function is to provide after-sales service and support. This function can create a perception of superior value in the minds of consumers by solving customer problems and supporting customers after they have purchased the product.

2. The support activities: The support activities of the value chain provide inputs that allow the primary activities to take place. 1. The materials management function controls the transmission of physical materials through the value chain, from procurement through production and into distribution. The efficiency with which this is carried out can significantly lower cost, thereby creating more value. 2. The human resource function helps to create value by ensuring that the company has the right mix of skilled people to perform its value creation activities effectively. It is also the job of the human resource function to ensure that people are adequately trained, motivated, and compensated to perform their value creation tasks. 3. Information systems refer to the (largely) electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, and so on. Information systems, when coupled with the communications features of the Internet, are holding out the promise of being able to alter the efficiency and effectiveness with which a company manages its other value chain activities. 4. The final support activity is the company infrastructure, or the companywide context within which all the other value-creation activities take place. The infrastructure includes the organizational structure, control systems, and organizational culture. Because top management can exert considerable influence in shaping these aspects of a company, they should also be viewed as part of the infrastructure of a company.

The Generic Building Blocks of Competitive Advantage: Four generic factors build competitive advantage by allowing companies to better differentiate their products or become more efficient in reducing costs: 1. Efficiency, 2. Quality, 3. Innovation, and 4. Responsiveness to customers.

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Strategic Management They are generic because they represent actions that any company can adopt, irrespective of industry. The factors are all highly interrelated.

Figure 3.8: Generic Building Blocks of Competitive Advantage Efficiency: Efficiency is measured by the cost of inputs required to produce a given output. 1.

The more efficient a company, the lower the cost of inputs required to produce a given output. Thus efficiency helps a company attain a low-cost competitive advantage.

2.

One of the keys to achieving high efficiency is utilizing inputs in the most productive way possible. Companies with high employee productivity and capital productivity will have low costs of production.

Quality products: Quality products are goods and services that have attributes that customers perceive as desirable. On important attribute is reliability, meaning that the product does the job it was designed for and does it well. Quality applies equally to goods and to services. 3.

Providing high-quality products creates a brand-name reputation for a company’s products. In turn, this enhanced reputation allows the company to charge a higher price for its products.

4.

Higher product quality can also result in greater efficiency, with less employee time wasted fixing defective products or services. This translates into higher employee productivity, which means lower unit costs.

Process innovation: Process innovation occurs if there is anything new or novel about the way a company operates. Product innovation occurs if there is anything new or novel about the company’s products. Thus innovation includes advances in the kinds of products, production processes, management systems, organizational structures, and strategies developed by a company. Department of Finance

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5.

Successful innovation gives a company something unique that its competitors lack (that is, until imitation occurs). This uniqueness allows a company to differentiate and charge a premium price.

6.

Successful innovation may also allow a company to reduce its unit costs.

Achieving customer responsiveness: Achieving customer responsiveness requires that a company give its customers exactly what they want when they want it. It involves doing everything possible to identify customer needs and to satisfy those needs. 7.

One way to increase customer responsiveness is to improve the efficiency production processes and the quality of products.

8.

Another way to increase responsiveness is to develop new products that have features currently not incorporated in existing products.

9.

Another way to increase responsiveness is to customize goods and services to the unique demands of individual customers.

10. Another way to increase responsiveness is to reduce customer response time, or the amount of time it takes for a good to be delivered or a service to be performed. In summary, superior efficiency enables a company to lower its costs; superior quality enables a company both to charge a higher price and to lower its costs; superior innovation can lead to higher prices or lower unit costs; and superior customer responsiveness enables a company to charge a higher price.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com http://jagannath.academia.edu/jony007ex

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Chapter- 4 Building Competitive Advantage through Functional Level Strategy

Overview This chapter addresses the role that functional-level strategies play in improving the effectiveness of functional operations within a company, such as manufacturing, marketing, materials management, research and development, and human resources. Functional strategies may also cut across two or more functions to attain a common goal. Functional-level strategies can improve effectiveness by helping an organization to achieve efficiency, quality, innovation, and customer responsiveness. Functional strategies are responsible for building the resources and capabilities that lead to distinctive competencies, allowing a firm to pursue a differentiation and/or low cost strategy.

Figure 4.1: The Roots of Competitive Advantage

Achieving Superior Efficiency: Efficiency is measured by the cost of inputs (labor, capital, equipment, know-how, and so on) required to produce a given output (the good or service produced by the company). The more efficient a company, the lower the cost of inputs is required to produce a given output. An efficient company has higher productivity than its rivals, and, therefore, lowers costs.

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Strategic Management Economies of scale: Economies of scale are unit-cost reductions associated with a large scale of output. Both manufacturing and service companies can benefit from economies of scale. 1.

One source of economies of scale is the ability to spread fixed costs over a large production volume.

2.

Another source is the ability of companies producing in large volumes to achieve a greater division of labor and specialization. Specialization improves employee productivity because it enables individuals to become very skilled at performing a particular task.

3.

Economies of scale raise ROIC in two ways. They reduce spending on COGS, SG&A, and R&D as a percentage of sales, improving return on sales. They also make more intensive use of existing PPE, increasing capital turnover.

4.

Economies of scale do not continue indefinitely. Typically, diseconomies of scale are reached at very high volumes, due to increased bureaucracy and the resulting inefficiencies.

Figure 4.2: Economies and Diseconomies of Scale

Learning effects:

Learning effects refer to cost savings that come from learning by doing. Labor productivity increases as individuals learn the most efficient way to perform a particular task and managers learn how best to run the operation. 5.

Learning effects are most important in a technologically complex task that is repeated, and are really important only during the start-up period of a new process. The importance of learning effects tends to cease after two or three years.

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Strategic Management 6.

Although economies of scale move a firm downward along the unit cost curve, learning effects shift the entire curve downwards.

Figure 4.3: The Impact of Learning and Scale Economies on Unit Cost

The experience curve: The experience curve refers to systematic unit-cost reductions that have been observed to occur over the life of a product. According to the experience-curve concept, unit manufacturing costs for a product typically decline by some characteristic amount each time accumulated output of the product is doubled.

Figure 4.4: The Experience Curve 7.

Economies of scale and learning effects underlie the experience-curve phenomenon. As a company increases the accumulated volume of its output over time, it is able to realize both economies of scale (as volume increases) and learning effects. As a consequence, unit costs fall with increases in accumulated output.

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Strategic Management 8.

The experience curve suggests that increasing a company’s product volume and market share will bring cost advantages over the competition. The concept is perhaps most important in those industries where the production process involves the mass production of a standardized output (for instance, the manufacture of semiconductor chips).

9.

If a company wishes to attain a low-cost position, it must ride down the experience curve as quickly as possible. This involves building an efficient scale plant ahead of demand and aggressively pursuing learning effects. It also involves aggressive price cutting and marketing in order to expand sales and get down the experience curve ahead of competitors.

For what reasons the company furthest down the experience curve must not become complacent about its position? However, the company furthest down the experience curve must not become complacent about its position for three reasons. a.

The experience curve bottoms out at some point, which implies that other companies can catch up.

b.

Cost advantages gained from experience effects can be made obsolete by the development of new technologies that require new methods of production.

c.

The experience curve suggests that high volume leads to a cost advantage, but this does not always happen. In some industries, there are two or more different production technologies, one of which is cost-efficient at high volumes, and the other at low volumes. A company using low-volume technology may be able to operate with a cost structure similar to that of companies using a high-volume technology.

Flexible manufacturing technologies:

It seems then, that the best way to reduce costs is to produce high volumes of a standard product. However, this view has been challenged by the rise of flexible manufacturing technologies, also called lean production. 1.

Flexible manufacturing technologies allow firms to produce a wider variety of product while still achieving the efficiencies of high volume production. Cost efficiencies are achieved by reducing setup times for complex equipment, increasing the utilization of individual machines through better scheduling, and improving quality control at all stages of the manufacturing process.

2.

Mass customization refers to the use of flexible manufacturing technologies to achieve low cost and differentiation through product customization. One type of flexible manufacturing technology is flexible machine cells, which are groupings of four to six various machines, a materials handler, and a central computer. The machines are computer controlled, allowing each cell to switch quickly between the productions of different products.

3.

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Flexible machine cells allow for improved capacity utilization due to a reduction in setup times and better coordination of production flow between machines.

Figure 4.6: Tradeoff between Costs and Product Variety b.

Flexible machine cells reduce work in progress and waste because of the tight coordination between machines and the ability of computercontrolled machinery to identify how to transform inputs into outputs while producing a minimum of unusable waste material.

Marketing strategy:

Marketing strategy refers to the position that a company takes with regard to pricing, promotion, advertising, product design, and distribution. 1.

Marketing strategy can increase efficiency by using aggressive pricing, promotions, and advertising to improve sales and help the organization ride down the experience curve.

2.

Another aspect of marketing strategy that can improve efficiency is the creation of customer loyalty, through high customer satisfaction. Loyalty reduces customer defection rates, or the percentage of a company’s customers that defect every year to competitors. a.

There is a direct relationship between defection rates and costs. Acquiring a new customer entails one-time fixed costs for advertising, promotions, and the like.

b.

The longer a company retains a customer, the greater is the volume of customer-generated unit sales that can be set against these fixed costs and the lower is the average unit cost of each sale.

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Figure 4.7: The Relationship between Customer Loyalty and Profit per Customer

Materials management: Efficiency can also be improved through the use of materials management, which encompasses the activities necessary to get materials to a production facility, through the production process, and through a distribution system to the end user. Materials management is also called supply chain management. 1.

Materials management typically accounts for 50 to 70 percent of a manufacturer’s costs—thus, even a small reduction can have a great impact.

2.

Improving the efficiency of the materials management function typically requires the adoption of just-in-time (JIT) inventory systems. JIT reduces inventory-holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before.

3.

The drawback of JIT systems is that they leave a firm without a buffer stock of inventory. Although buffer stocks of inventory are expensive to store, they can help tide a firm over shortages on inputs brought about by disruption among suppliers.

R&D strategy and efficiency:

The R&D function can boost efficiency by designing products that are easy to manufacture, cutting down on the number of parts and reducing assembly time. R&D can also pioneer process innovations to improve efficiency. Human resource strategy and efficiency: The human resource function can aid in improving efficiency by raising employee productivity. 4.

Recruiting is one area where human resources can help. Carefully hiring individuals with the right attitudes and values can raise employee productivity. Skilled employees can also interact with customers in ways that improve customer loyalty.

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Strategic Management 5.

Another way to raise employee productivity is through training. Skilled individuals perform tasks more quickly and accurately, and are better able to learn complex tasks. A company can upgrade the skill level of its employees through training.

6.

Self-managing teams, where members are responsible for coordinating their own activities, are another source of efficiency gain. Team members learn all team tasks and rotate from job to job, creating a more flexible workforce in which members can fill in for absent coworkers. Teams also take over managerial duties, and the resulting empowerment is a motivator.

7.

Another boost to productivity comes from linking pay to performance. Successful companies are careful to specify the quality, as well as the quantity, of production. Successful firms also tend to reward group, rather than individual, performance, in order to improve cooperation among employees.

Information systems, the internet and efficiency: With the rapid growth of computers, the Internet, corporate intranets, and high bandwidth communications, the information systems function contributes to operational efficiencies. 8.

Information systems can improve labor efficiency by automating tasks that were previously performed manually.

2.

Web-based information systems can reduce the costs of supply chain coordination, including the relationships between the company and its customers, and the company and its suppliers.

3.

On-line sellers can replace their capital-intensive physical locations with a much less costly web site.

Infrastructure:

Infrastructure can also improve efficiency, as a companywide commitment to low costs can be built through top management leadership. Leaders can also facilitate cooperation among functions in the pursuit of efficiency goals.

Achieving Superior Quality:

Achieving superior quality gives a company two advantage. 1. First, the enhanced reputation for quality allows the company to differentiate and thus charge a premium price for its products. 2. Second, by eliminating defects or errors from the production process, superior quality can result in greater efficiency and hence lower costs. Total Quality Management (TQM): One aspect of quality is reliability. Total Quality Management (TQM) is a technique to improve reliability. TQM stresses that quality should be a main concern of the company, and that all of a company’s operations should be oriented toward this end.

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What is TQM philosophy based on? The TQM philosophy, as articulated by Deming and others, is based on a five-step chain reaction.  Improved quality means that costs decrease because of less rework, fewer mistakes, fewer delays, and better use of time and materials.  As a result, productivity improves.  Better quality leads to higher market share and allows the company to raise prices.  This increases the company’s profitability and enables it to stay in business.  Thus the company creates more jobs.

The role played by different functions in implementing TQM:  Provide leadership and commitment to quality: Infrastructure (firm leadership) can build an organizational commitment to quality. TQM must be embraced by all, and top managers serve as role models. Also, the human resource function must take on responsibility for companywide training in TQM techniques.  A focus on the customer: A focus on the customer is the starting point of the whole quality philosophy. The marketing function, because it provides the primary point of contact with the customer, should play a major role here. The role of marketing is to identify customer needs, to identify how the company meets those needs, to identify the quality gap that exists between what customers want and what they actually get; and, in conjunction with other functional areas, to formulate a plan for closing the quality gap.  Find ways to measure quality: TQM requires objective measures of quality, including identification of the customer’s perspective on quality, and development of a metric to capture this. Top management, with input from other functional areas, should formulate various metrics to measure quality.  Set goals and create incentives: Top management and human resources should set goals and create performance incentives, to motivate workers to reach quality targets.  Solicit input from employees: Employees can be an important source of information regarding the sources of poor quality. Therefore, some framework must be established for soliciting employee suggestions as to the improvements that can be made (for example, quality circles). Top managers should establish a communication mechanism.  Identify defects and trace them to source: A major source of product defects is the production process. TQM preaches the need to identify defects in the work process, trace them to the source, find out why they occurred, and make appropriate corrections. Manufacturing and materials management typically have primary responsibility for this task.  Supplier relations: Poor-quality raw materials and components are a major source of poor-quality finished goods. Personnel in the materials management

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Strategic Management function can improve quality by reducing the number of suppliers and then building cooperative relationships with those that remain.  Design for ease of manufacture: R&D and manufacturing need to be involved in designing products that are easy to manufacture, in order to reduce mistakes and defects.  Break down barriers among functions: Top management must ensure that there is close cooperation among functions.

Attributes associated with a product offering: In addition to reliability, superior quality depends upon the development of other attributes, such as form, features, performance, durability, and styling, which contribute to differentiation. Table drawn in below summarizes attributes of products, services, and personnel that may be valued by customers.

How can be a company’s products and services be superior to competitors’? A company’s products and services must be superior to competitors’ offerings in order to be regarded as high quality. a.

To accomplish this, marketing intelligence is used to identify the attributes that customer’s value.

b.

Then, products must be designed and personnel trained to deliver that attribute.

c.

Next, the company’s marketers must decide which attributes to promote and how to position them for consumers. Usually, firms focus on just one or two critical attributes.

d.

Finally, a strong R&D function can help the firm continual improve its offerings to stay ahead of competitors.

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Achieving Superior Innovation: In many ways, innovation is the single most important building block of competitive advantage. 1.

Innovation is what gives a company something unique. Uniqueness allows a company to charge a premium price or to lower its cost structure below that of its rivals.

2.

Studies in several industries have shown that innovation is a major driver of superior profitability.

Causes of high rate of failure of innovations: However, the failure rate of innovations is high, due to a variety of causes. Only about 12 percent of R&D projects result in a product for which the profits exceed the company’s cost of capital. 3.

Investment in R&D is a high-risk, high-return strategy. The high risk comes from the high failure rate of most new-product innovations. The high return comes from the quasi-monopoly revenues that a successful innovation can earn for a company.

4.

Uncertainty about the future is one reason for the high failure rate of innovation. New-product development requires asking a question whose answer is impossible to know prior to market introduction; namely, is there sufficient market demand? Although good market research can minimize uncertainty about demand, the uncertainty cannot be eradicated altogether. a.

Quantum innovations represent a radical departure from current technology, whereas incremental innovations represent an extension of existing technology.

b.

Quantum innovations are accompanied by higher uncertainty, and thus are more likely to fail than are incremental innovations.

5.

Another reason for the high failure rate of new-product introductions is poor commercialization, which occurs when there is demand for a new product, but the company’s offering is not well adapted to consumer needs because of poor design or poor quality.

6.

Another cause of innovation failure is the poor positioning strategy that arises when an attractive new product garners low sales because it is poorly positioned in the marketplace. Positioning strategy is the position a company adopts for a product on four main dimensions of marketing—price, distribution, promotion and advertising, and product features.

7.

Another reason why many new product introductions fail is that companies often make the mistake of marketing product based on a technology for which there is not enough consumer demand. Technological myopia occurs when a company gets blinded by the wizardry of a new technology and fails to examine whether there is consumer demand for the product.

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Strategic Management 8.

New products fail when companies are slow to get their products to market. The longer the time between initial development and final marketing, the more likely that someone will beat the firm to market. Also, slow innovators tend to update their products less frequently than fast innovators and therefore, can be perceived as technical laggards relative to the fast innovators.

What actions firms can take to build competencies in innovation to reduce the chances of failure? There are a number of actions that firms can take to build competencies in innovation and reduce the chances of failure. 9.

Building skills in basic and applied research requires the employment of research scientists and engineers and the establishment of a work environment that fosters creativity. A number of top companies try to achieve this by setting up university-style research facilities, where scientists and engineers are given time to work on their own research projects, in addition to projects that are linked directly to ongoing company research.

10. Project management is the overall management of the innovation process, and it requires three important skills: the ability to encourage idea generation, the ability to select the most promising projects at an early stage of development, and the ability to minimize time to market.

a.

Effective project management can be facilitated by using a threephase development funnel. The objective in Phase I of the development funnel is to widen the mouth of the funnel to encourage as much idea generation as possible. To do so, a company should solicit input from all functions of the company, as well as from customers, competitors, and suppliers.

b.

At Gate 1, the funnel is narrowed. Here ideas are reviewed by a cross-functional team of managers that were not involved in the original concept development. The concepts that are ready to proceed then move on to Phase II of the funnel, which is where the details of the project proposal are worked out.

c.

Gate 2 is a go, no-go evaluation point. Senior managers are brought in to review the various projects and to select those that seem likely winners. Any project selected to go forward at this stage will be

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Strategic Management funded and staffed with the expectation that it will be carried through to market introduction. d.

In Phase III, the project development proposal is executed by a cross-functional team in order to ensure that time to market is minimized.

11. Tight cross-functional integration between R&D, production, and marketing can help a company to ensure that (1) product development projects are driven by customer needs, (2) new products are designed for ease of manufacture, (3) development costs are kept in check, and (4) time to market is minimized. a.

Close integration between R&D and marketing is required to ensure that product development projects are driven by the unmet needs of customers.

b.

Integration between R&D and production can help a company to ensure that new products are designed with existing manufacturing capabilities in mind.

12. One of the best ways to achieve cross-functional integration is to establish cross-functional product-development teams. These are teams composed of representatives from R&D, marketing, and production. The objective of a team should be to take a product development project through from the initial concept development to market introduction. a.

The team should be led by a “heavyweight� project manager who has high status within the organization and who has the power and authority required to get the financial and human resources that the team needs to succeed.

b.

The team should be composed of at least one member from each key function.

c.

The team members should be physically co-located to create a sense of camaraderie and to facilitate communication.

d.

The team should have a clear plan and clear goals, particularly with regard to critical development milestones and development budgets.

e.

Each team needs to develop its own processes for communication and conflict resolution.

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Strategic Management 13. One way in which a product development team can speed time to market is to use a partly parallel development process. Traditionally, product development processes are sequential. In a partly parallel development process, stages overlap so that work can be done in more than one stage simultaneously, shortening time to market.

Achieving Superior Customer Responsiveness: Achieving superior customer responsiveness requires that a company give customers what they want when they want it and at a price they are willing to pay—so long as the company’s long-term profitability is not compromised in the process. 14. The more responsive a company is to the needs of its customers, the greater the brand loyalty that the company can command. In turn, strong brand loyalty may enable a company to charge a premium price for its products or sell more goods and services to customers. 15. Achieving superior efficiency, quality, and innovation are all part of achieving superior customer responsiveness.

Customer Focus: A company must know its customers’ needs in order to respond to them. Thus the first step in building superior customer responsiveness is to get the whole company to focus on the customer. 16. Customer focus must start at the top of the organization with leadership. A commitment to superior customer responsiveness involves attitudinal changes throughout a company that can only be affected through strong leadership. 17. Achieving a superior customer focus requires the right employee attitudes— leadership alone is not enough. Employees need to be trained to put themselves in the customers’ shoes, to identify ways of improving the quality of a customer’s experience with the company. To reinforce this mindset, incentive systems should reward employees for satisfying customers. Department of Finance

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18. Another aspect of knowing the customer is listening to what customers say and bringing them into the company. This may mean soliciting feedback from customers and building information systems that communicate the feedback to the relevant people.

Satisfying customer needs:

The next task is to satisfy customer needs, with efficiency, quality, and innovation all playing a part. 19. In addition to efficiency, quality, and innovation, companies can satisfy customer needs through customization. This involves varying the features of a good or service to tailor it to the unique needs of groups of customers, or in the extreme case, individual customers. Traditionally, customization raises costs; however, flexible manufacturing allows a company to produce a greater variety of products without raising costs. 20. Customization has fragmented many markets into ever-smaller niches, allowing firms to cater to the particular needs of a small segment of customers.

Response time: Giving customers what they want when they want it requires speed of response to customer demands. To gain a competitive advantage, a company often needs to be fast at responding to consumer demands. Increased speed allows a company to charge a significant premium. 21. Reducing response time requires a marketing function that can quickly communicate customer requests to manufacturing. 22. The manufacturing and materials management functions that can quickly adjust production schedules in response to unanticipated customer demands also enable the firm to respond more rapidly. 23. Rapid responses also relies on information systems that can help manufacturing and marketing in this process.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com http://jagannath.academia.edu/jony007ex

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Chapter- 5 Building Competitive Advantage through Business Level Strategy

Introduction

This chapter examines the issue of how a company can use business-level strategy to compete effectively in an industry, maximizing its competitive advantage and profitability. Business-level strategy refers to the plan of action that strategic managers adopt for using a company’s resources and distinctive competencies to gain a competitive advantage over its rivals in a market or industry. To choose an appropriate business-level strategy, a firm must first describe its business model. One critical component of a business model is the company’s definition of customer needs, which describes “what” is being satisfied.

Customer needs: Customer needs are desires that can be satisfied by attributes of a product. How Customer needs can be satisfied? Two factors determine which product a customer chooses to satisfy these needs. 1. The price of the products and 2. The way a product is differentiated from other products of its type.

Differentiation:

Product differentiation is the process of designing products to satisfy customers’ needs. 1.

Customer needs can be satisfied by the product’s price or by its differentiation from other, similar products.

2.

All companies must differentiate their products to satisfy some customer needs, but some companies do this to a much greater degree than others.

3.

Companies that use differentiation are seeking to create something unique about their products to satisfy needs in ways in which other companies cannot. Even within relatively narrow market segments, customer needs differ widely.

4.

Companies must balance their desire to differentiate their product against the accompanying increase in price. However, customers are often willing to pay a premium price for a product that closely meets their specific needs.

5.

Uniqueness springs from product attributes. a. Uniqueness may spring from physical characteristics of the product, such as quality or reliability. b. Uniqueness may be based on an appeal to a psychological need of customers, such as status or prestige.

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Market segmentation:

Market segmentation indicates the definition of customer groups “who” is to be satisfied. Market segmentation depends on the way the company groups its customers according to important differences in needs or preferences. 1. 2.

3.

Market segmentation may be based upon the price the customer is willing to pay, or it may be based on the particular need being satisfied by a product. Companies must develop a strategy for differentiating products for each market segment.  One strategy is to serve the average customer, ignoring market segmentation.  Another strategy consists of segmenting the market into different groups and developing a product to suit each group. As compared to the “average customer” strategy, this strategy allows the firm to better serve more customers’ needs, generating more revenue.  A third strategy has companies concentrating their efforts on serving only one or a few market segments. Some products do not allow very much differentiation, such as cement. In this industry, price becomes the most important consideration.

Distinctive competency:

The third component of a business model is the decision about what type of distinctive competency to pursue, or “how” a customer’s needs are to be satisfied. The four major types of distinctive competencies are superiority in efficiency, quality, innovation, and responsiveness to customers.

Figure 5.1: The Dynamics of Business-Level Strategy

How Differentiation and costs affect each other in a dynamic process? 4.

The decision to differentiate increases value for the customer, who increases demand, leading to economies of scale and lower unit costs.

5.

Differentiation also requires higher costs, to provide the attributes that contribute to the product’s uniqueness, and that contributes to higher unit costs.

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6.

Pricing then must be carefully set, to compensate for the cost of differentiation, but not so high as to stifle demand.

7.

Companies must seek to drive down costs, while maintaining the source of differentiation.

8.

In addition, each of these above decisions is made in a competitive environment, so companies must carefully consider the actions of their competitors as they choose their level of differentiation, cost structure, pricing, and so on.

Table 5.1: Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

Choosing a Generic Business-Level Strategy

There are several generic business-level strategies. “Generic� refers to the fact that these strategies could be pursued by any company, operating in any industry. 1. 2. 3. 4. 5.

Cost leadership strategy Differentiation strategy Cost leadership and differentiation Focus differentiation and Focus cost leadership

Cost Leadership Strategy:

A company’s goal in pursuing a cost leadership strategy is to outperform competitors by producing goods and services at a lower cost.

How cost leadership strategy can lead to above-average profits? a.

First, when all companies charge the same price, the cost leader makes higher profits because its costs are lower.

b.

Second, if price wars develop and competition increases, then high-cost companies will be driven out of the industry before the cost leader.

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To become the cost leader what steps a company must take?

To become the cost leader a company must make choices about its product, market, and distinctive competencies. c.

The cost leader chooses low product differentiation, aiming for a level of product differentiation obtainable at low cost.

d.

The cost leader chooses to serve the needs of the average customer to avoid the high costs of serving different market segments. Perhaps no one is wholly satisfied with the product, but because its price is lower, some customers choose it.

e.

The cost leader chooses to develop competencies in manufacturing, because it must ride down the experience curve to lower costs. Materials management and information technology are other important sources of cost savings. Other functions tailor their distinctive competencies to meet the needs of these three areas.

What advantages cost leadership strategy provides businesses with?

The cost leadership strategy provides businesses with some advantages, as discussed in terms of Porter’s five forces model. f.

In the area of competitors, the cost leader is protected by its cost advantage.

g.

Lower costs mean that the cost leader will be less affected by powerful suppliers than competitors. Also, the cost leader’s large volume purchases give the firm an advantage over suppliers.

h.

The cost leader is less affected by buyers’ power to set prices, because its prices are already low.

i.

The cost leader is better able than its competitors to reduce its price in order to compete against potential substitutes.

j.

Potential entrants face high barriers to entry because of the cost leader’s low-price advantage.

What are the dangers a cost leader may face? A cost leader faces some dangers. k.

Competitors may find ways of lowering their costs, perhaps because of technological developments or because of cost savings, such as those foreign competitors can sometimes achieve.

l.

Competitors may imitate the cost leader’s methods, reducing their own costs.

m.

In a single-minded effort to reduce costs, the cost leader may lose sight of changes in consumer tastes.

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What are the implications on choice of a cost leadership strategy for managers? The choice of a cost leadership strategy has some implications for managers. n.

Managers must diligently pursue cost advantages in every function, especially the key cost drivers of manufacturing, materials management, and information technology.

o.

Managers must constantly monitor changing industry conditions, and be alert to the possibility of competitors mimicking their firm’s low-cost methods.

p.

Managers must monitor the industry’s differentiators to ensure that their firm doesn’t fall too far behind in offering attributes that customer desire.

Differentiation: The objective of differentiation is to achieve a competitive advantage by creating a product or service that is perceived to be unique in some way.

How differentiation strategy can lead to above-average profits? q.

A differentiator can charge a premium price for its products—that is, a price higher than its competitors’ prices—because customers perceive the product’s differentiated qualities to be worth it.

r.

For a differentiator, product pricing is done on the basis of what the market will bear.

How differentiators make choices about its product, market, and distinctive competencies? To become a differentiator a company must make choices about its product, market, and distinctive competencies. s.

The differentiator aims for a very high level of differentiation and frequently produces a wide range of products. Differentiation can be achieved through quality, innovation, and responsiveness to customers.

t.

A differentiator segments its market into many niches, offering products for many market niches.

u.

For a differentiator, the importance of each function depends on the source of the differentiation. For example, if it seeks a competitive advantage based on innovation, the key function is R&D. This does not imply that manufacturing is unimportant. Instead, the differentiator wants to control costs enough so that the price charged is not higher than what customers are willing to pay.

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Advantages of differentiation strategy: The differentiation strategy provides businesses with some advantages, as discussed in terms of Porter’s Five Forces Model. v.

Competitors are less of a threat for differentiators, due to the company’s brand loyalty.

w.

Powerful suppliers are rarely a problem because the differentiator’s strategy is not as focused on driving down costs as is a cost leader’s strategy. Increased costs can often be passed on to customers.

x.

Powerful buyers are rarely a problem because only the company can supply the differentiated product.

y.

The threat of substitute products is low, due to the low probability of finding another product that can meet the same customer needs and break brand loyalty.

z.

Potential entrants are discouraged by the high cost of developing a unique product to compete against the differentiator, who enjoys strong brand loyalty.

What risks a differentiator may face? A differentiator faces some risks. aa. The differentiator must maintain its perceived uniqueness in customers’ eyes and defend itself against agile imitators. This is especially critical when the source of the differentiation is a physical feature of the product, which is often relatively easy to imitate. bb. Another threat is that a source of uniqueness may be overridden by changes in consumer tastes and demands. A company must constantly look for ways to match its unique strengths to changing product/market opportunities. cc. A differentiator must be cautious in setting prices. If prices are perceived as too high, customers may switch in spite of the differentiated product’s uniqueness.

For what advantages generic strategies can be followed with flexible manufacturing technologies simultaneously? Due primarily to the impact of flexible manufacturing technologies, it is possible to follow both generic strategies simultaneously. 1.

Flexible manufacturing systems enable companies to manufacture many different models of a product at little extra cost than if they produced large batches of standardized products.

2.

Flexible manufacturing allows companies to build many different models of a product cost-effectively, because of the use of standardized components.

3.

Some companies provide efficient customization by allowing customers to choose from a limited number of options.

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Strategic Management 4.

Many firms are using the Internet to have customers perform some of their own service, paying bills, gathering information, and so on. This reduces costs allowing the company to differentiate itself through higher service.

5.

Direct sales businesses use the Internet for marketing and logistics, reducing costs and increasing responsiveness to customers.

6.

Overseas manufacturing reduces labor expenses so much that companies are able to produce differentiated products at very low cost.

7.

Firms that pursue both strategies have a competitive advantage compared with the differentiator because they have lower production costs; they also have an advantage compared with the cost leader because they can charge a premium price. Consequently, more and more firms are pursuing both strategies simultaneously.

Focus strategy: The focus strategy positions a company to compete for customers in particular market segment, based on geography, customer type, or market segment.

Figure 5.2: Why Focus Strategies Are Different

Low cost and differentiation: A focus strategy can be pursued using either a differentiation or a low-cost approach. a.

If a company adopts a focused low-cost strategy, it competes against the market cost leader only in those segments where it has no cost disadvantage, such as small niches or complex products that do not lend themselves to economies of scale.

b.

If a company adopts a focused differentiation strategy, it competes against the differentiator by exploiting their knowledge of a small customer set or of a particular specialization within the broader range of products.

c.

Focused differentiators may also be more innovative than larger firms, because the focuser is concentrating on the needs of just one type of customer.

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How focusers make choices about its product, market, and distinctive competencies? To become a focuser a company must make choices about its product, market, and distinctive competencies. d.

Product differentiation is low for a focused cost leader and high for a focused differentiator.

e.

Market segmentation is low, with the focuser filling just one or a few niches.

f.

The choice of distinctive competency depends on the company’s source of competitive advantage. If it is differentiation, the competency could be R&D or service; if it is low cost, the competency could be local manufacturing.

Advantages of focused strategy: The focused strategy provides businesses with some advantages. Focusers can find a niche that is unfilled by the large firms, and then develop a specialized product to fill that need. Focused companies can also grow by taking over other focusers. Other advantages exist, as discussed in terms of Porter’s Five Forces Model. g.

Focusers are protected against rivals because it can provide a product or service at a price or quality others cannot offer.

h.

Powerful suppliers are a threat because the focuser buys in such small volumes that it has less bargaining power. However, if the company is pursuing a focused differentiation strategy and can pass on price increases; this is less of a problem.

i.

A focuser’s ability to satisfy unique customer needs gives the company power over its buyers; they cannot get the same thing from other companies.

j.

Potential entrants have to overcome the hurdle of consumer loyalty, so the focuser is somewhat protected.

k.

Substitute products must overcome consumer brand loyalty, so again, the focuser is somewhat protected.

What are the risks a focuser may face? A focuser faces some risks. l.

Because the focuser produces at smaller volumes, its costs will be higher than those of the low-cost company.

m.

If the focuser’s niche suddenly disappears because of changes in technology or consumer tastes, it is hard to switch to a new niche quickly.

n.

Large differentiators may compete for the focuser’s niche if it becomes very profitable, as occurred in IBM’s fight with Apple.

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Stuck in the middle: When a company chooses a generic strategy that is inconsistent with its capabilities and resources, or when a company simply fails to choose and implement a coherent strategy, that firm is said to be stuck in the middle. Such firms are unable to obtain a competitive advantage, and they will earn below-average profits.

What paths lead to a company becoming stuck in the middle?

There are many paths that lead to a company becoming stuck in the middle. o.

A company may start out by pursuing a generic strategy but loses that strategy because it makes the wrong choices or because the environment changes.

p.

A successful focuser may unsuccessfully try to become a broad differentiator.

q.

Differentiators may find competitors entering their market and chipping away at their competitive advantage.

Competitive Positioning and Business-Level Strategy:

There are some tools those managers can use to position themselves with regard to competitors is strategic group analysis: 1. Strategic group analysis 2. Investment analysis 3. Game theory

Strategic group analysis: One of the tools that managers can use to position themselves with regard to competitors is strategic group analysis. 1.

Companies in an industry that are pursuing the same business-level strategy make up a strategic group.

2.

A careful analysis of strategic groups can help managers understand the past actions and likely future actions of competitors.

3.

A company is most threatened by members of its own strategic group, because those firms are pursuing the same strategy, and consumers tend to view their products as being substitutes.

4.

Different strategic groups can have a different standing with respect to each of Porter’s five forces because the five forces affect companies in different ways.

5.

Mobility barriers inhibit the movement of companies between strategic groups, and the height of mobility barriers determines how successfully companies in one group can compete with companies in another.

6.

If companies in one strategic group can either lower their costs or increase differentiation, they can compete successfully with companies in another

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Strategic Management strategic group. In effect, they have created yet another strategic group—a combined low-cost and differentiation strategic group, which has the strongest competitive advantage and the greatest ability to earn above-average profits.

Investment analysis:

Another tool that managers can use to position themselves with regards to competitors is investment analysis. 7.

An investment analysis refers to decisions about the amount and type of resources that must be invested to gain a competitive advantage.

8.

Different strategies require different amounts and types of resources. Differentiation is the most expensive strategy because of the need to provide uniqueness. Cost leadership is less expensive, once the initial investment in plant and equipment has been made. Focus is the least expensive because fewer resources are needed to serve just one market segment rather than the whole market.

9.

In deciding on an investment strategy, the company must evaluate the returns from a strategy against the cost of developing that strategy. Two factors are important in determining the potential returns from an investment strategy: the strength of a company’s competitive position and the stage of the industry life cycle.

What are the Factors important in determining the potential returns from an investment strategy? Two factors are important in determining the potential returns from an investment strategy: the strength of a company’s competitive position and the stage of the industry life cycle.

a. One required factor in choosing an investment strategy is knowledge about the strength of a company’s competitive position. b. The second factor influencing investment strategy is the stage of the industry life cycle.

Discuss about the industry life cycle. (1) The nature of the opportunities and threats from the environment is different at each stage, affecting the potential returns from a competitive strategy. (2) At the embryonic stage, companies are developing a distinctive competency, so investment needs are very great, leading to a strategy for building market share. Companies require large amounts of capital to develop a competitive advantage and much of this must come from outside investors.

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Table 5.2: Choosing an Investment Strategy at the Business Level (3) At the growth stage, a company should try to grow in pace with the growth of the market, in order to consolidate its position and survive the coming shakeout. Growing requires large amounts of capital, as does the development of distinctive competencies. Companies in strong positions segment their markets to increase market share, whereas companies in a weak position become a focuser, to lower expenses. Very weak companies exit the industry. (4) By the shakeout stage, companies in strong competitive positions are increasing their market share by attracting customers from exiting companies. Cost leaders invest in cost control. Differentiators enter more market segments and offer more products. Weak companies choose a focus strategy, or if very weak, a harvest or liquidation strategy. (5) By the maturity stage, companies want to reap profits from their past investment in the business. All companies tend to pursue both cost leadership and differentiation. Strong companies stop aggressively pursuing new customers and invest less. This works well if the environment is constant and the number of competitors stable. All too often, however, large companies rest on their laurels and allow competitors to catch them unawares. Weak companies use the decline strategies (see below). (6) The decline stage starts when demand for the industry’s products begins to fall. Companies in strong positions that are cost leaders choose a market concentration strategy, consolidating products and markets, or an assetreduction (or harvest) strategy, decreasing investment and milking profits. Strong companies that are differentiators use a turnaround strategy. If these strategies are not possible, the company may liquidate assets, or it may sell the entire business, called “divestiture.�

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Strategic Management

Discuss about Competitive position. (1) Competitive position is a function of a firm’s market share. Large market share provides the company with experience-curve effects or suggests that the company has brand loyalty. Also, a large market share creates a large cash flow, providing resources for investment in developing competencies. (2) Competitive position is also a function of a firm’s strength in its distinctive competencies. For example, the more difficult its R&D or service expertise is to imitate, the stronger is its position. (3) These factors reinforce one another, so a company with both is in a very strong position and is probably a good investment.

Game theory: Another tool that managers can use to position themselves with regards to competitors is game theory. 10. Game theory is a branch of social sciences theory that describes the actions and reactions of rivals in a competitive game. 11. Business competition can be modeled using game theory. In this game, companies make decisions that can affect outcomes (profitability) without knowing each other’s moves. a. Games may be sequential, with moves following one after another, such as occurs in chess. b. Games may also be simultaneous when players choose at the same time, as occurs in rock-paper-scissors. c. Business competition entails use of both sequential and simultaneous games. 12. Game theory works well in describing situations where the number of rivals is stable and limited, and the interdependence between the players is high. This situation occurs in mature, competitive industries.

What are the principles of game theory? Game theory consists of a number of related principles. a.

The principle of “look forward and reason back” says that managers should try to predict and anticipate the future and then use that information to reason backward to determine the strategic moves they need to make today.

b.

A second principle of game theory is “know thy rival,” because a company’s ability to make accurate predictions about a competitor’s likely future actions is based upon knowledge about the competitor’s cost structure, pricing, and so on.

c.

A third principle is “find the most profitable dominant strategy.” This principle asks managers to try to find a strategy that gives their company an advantage, no matter what strategies competitors follow.

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Strategic Management d.

A fourth principle is “strategy shapes the payoff structure of the game.”

Discuss about the principle of “look forward and reason back. The principle of “look forward and reason back” says that managers should try to predict and anticipate the future and then use that information to reason backward to determine the strategic moves they need to make today. (1) Strategies that appear at first glance to be effective may not be when the likely reactions of competitors is included in the model. (2) Decision trees are one tool that can be used to look forward and reason back.

Discuss about the principle of “find the most profitable dominant strategy”. A third principle is “find the most profitable dominant strategy.” This principle asks managers to try to find a strategy that gives their company an advantage, no matter what strategies competitors follow. (1) A payoff matrix can be used to determine likely outcomes under different combinations of strategies selected by a company and its competitors.

Figure 5.4: A Payoff Matrix for GM and Ford (2) A common outcome is that, when each company picks its “best” strategy, the resulting combination offers the lowest profits to the competitors. This sets up a prisoner’s dilemma situation, in which competition leads to low outcomes while cooperation results in higher outcomes.

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Strategic Management

Discuss about the principle of “strategy shapes the payoff structure of the game.” A fourth principle is “strategy shapes the payoff structure of the game.”

Figure 5.5: Altered Payoff Matrix for GM and Ford (1) This principle, taken together with the first three principles, for example, says that the way out of a destructive price war is for competitors to change their business models and increase their product differentiation, reducing customers’ sensitivity to price. (2) Another implication of this principle is that companies need to think about more than just the effectiveness of a particular strategy, they also need to consider how their strategic choices can affect the payoff structure of competition in their industry.

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Strategic Management

Chapter- 6 Strategy In High Technology Industries

Overview Technology refers to “the body of scientific knowledge used in the production of goods or services.” High-technology industries (also called high-tech industries) are ones in which the scientific knowledge used by companies in the industry is advancing rapidly, leading to rapid changes in the attributes of goods and services. Examples of high-tech industries include the computer industry, telecommunications, consumer electronics, pharmaceuticals, power generation, and aerospace, among others. High-technology industries deserve special consideration because they are an everincreasing part of our economy, many traditionally low-technology industries and products are becoming more high-tech, and high-tech firms a similar competitive situation.

Technical Standards and Format Wars

Technical standards are “a set of technical specifications that producers adhere to when making the product or component,” and they can be a source of differentiation, leading to competitive advantage. 1. Competitive struggles over control of technical standards are called “format wars.” 2. Examples of technical standards include the layout of a computer keyboard, the dimensions of shipping containers such as trucks and railcars, and the components included in a personal computer. 3. When an industry relies upon a common set of features or design characteristics, such as the Wintel design for personal computers, this is called a “dominant design.” Each dominant design may be made up of a set of related technical standards. 4. In a format war, the winner will be the company that best exploits positive feedback loops. 5. Companies that fail to adopt the dominant design as it emerges may find themselves locked out of the market. Customers may be unwilling to bear the switching costs of changing to an alternate technology, unless the benefits of doing so outweigh the costs. 6. As a new technology becomes more widely adopted, there comes a point at which the prior technology becomes outmoded. For example, CDs replaced the long-playing record.

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Strategic Management Standards: Standards provide economic benefits to those companies that adhere to them. Advantages of Standards: 1.

Standards guarantee compatibility, such as the ability to use the same software programs on different brands of PCs.

2.

Standards help reduce consumer confusion. When consumers sense that the technology is still evolving, they may delay purchase, which can cause the technology itself to fail to gain initial acceptance in the market.

3.

Standards serve to reduce production costs, by facilitating mass production, along with its consequent economies of scale and lower costs. Both manufacturers and components suppliers are able to benefit from standards, reducing the cost of components too.

4.

Standards reduce the risk associated with supplying complementary products. Makers of complementary products, such as software providers for the PC industry, will hesitate to invest in producing complementary products until standards are reached. A low supply of complementary products can reduce sales of the product.

Emergence of standards in a Industry: Standards emerge in an industry in several ways. When standards are set by the government or industry group, they are part of the public domain, meaning that any company can use that standard in their products. 5.

Companies may lobby the government to mandate an industry standard. An example would be the digital TV broadcast standards put forth by the FCC.

6.

Companies may band together to cooperatively establish standards, without government intervention, as DVD manufacturers did.

7.

Standards may also be selectively chosen by consumers, who use market demand as a selection mechanism. Microsoft and Intel both use proprietary standards, which are protected through patents.

Network effects: Network effects arise in industries where the number of complementary products is a primary determinant of standards. For example, the success of VCRs is driven by the standard VHS format for tapes, creating a positive feedback loop, in which demand for VCRs led to demand for tapes, and the increased availability of tapes led to further demand for VCRs.

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Strategic Management Strategies for Winning a Format War It’s clear that firms benefit when they exploit network effects and when positive feedback loops are in operation, so companies must find a way to make the effects work in their favor and against their competitors. Therefore, they must build an installed base as rapidly as possible, leveraging the positive feedback loop, forcing customers to bear switching costs, and locking the market into their technology.  Ensure a supply of complementary products: One important step for firms to take in winning a format war is to ensure a supply of complementary products.  One way for companies to ensure a supply of complements is to diversify into the production of complements themselves.  Another way is to create incentives for others to produce complements, such as reducing licensing fees or providing technical assistance.  To leverage killer applications: Another important step is to leverage killer applications, those uses of a product that are so compelling to consumers that they kill demand for competing formats. The killer applications can either be developed by the company itself or by other firms.  To price and market their products aggressively: A third strategy for winning a format war is for the companies to price and market their products aggressively.  One common pricing strategy is to price the product low and the complements high, such as the way Hewlett-Packard prices printers at cost, and then charges substantial markup on ink cartridges.  Aggressive marketing strategies include substantial up-front marketing and point-of-sale promotion to encourage first-time buyers.  Cooperation with competitors: Yet another strategy involves cooperation with competitors, in order to ensure compatibility and lock out alternative technologies.  Licensing the format: Another strategy requires licensing the format, so that the licensing firm may profit from licensing fees while also boosting demand and speeding adoption of the format. A relatively low licensing fee reduces the financial incentive for competitors to develop their own, alternative formats. These five strategies may be used in combination, depending upon the unique demands of the situation. Care is needed to select the optimal mix of strategies, as well as to ensure that strategies are working together, and not counteracting against each other.

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Strategic Management

Costs in High-Technology Industries A.

In most high-tech industries, the fixed costs of product development are very high, whereas the marginal costs—the costs of producing one extra unit of the product—are very low. The initial costs of R&D and building manufacturing capacity contribute to the high fixed costs, whereas the marginal costs might be just a small amount, especially in a mass production environment where the product might be a DVD or a piece of software.

B.

The high fixed costs and low marginal costs of high-tech industries stands in contrast to many traditional industries, where the marginal costs tend to increase as production rises. Figure 7.3 graphically illustrates how the differing relationships between fixed and marginal costs lead to different levels of profitability.

C.

The implication for strategy is that companies should try to switch from an industry with increasing marginal costs to one where marginal costs are lower, in order to increase profitability.

D.

Another strategic implication is that companies should deliberately drive prices down to drive volume up, leading to increased profitability.

Managing Intellectual Property Rights E.

Intellectual property refers to the product of any intellectual and creative effort, which would include products such as music, film, books, graphic arts, manufacturing and other processes, and new technology of any type.

F.

Intellectual property is a very important driver of economic progress and social wealth. That is, nations where many individuals or firms are creating valuable intellectual property will prosper, as will the individuals or firms. However, the creation of intellectual property is often expensive, risky, and time-consuming. The costs of a new technology may be in the hundreds of millions of dollars, and the failure rate may be close to 90 percent in some industries.

G.

Because of the expense and risk, few would undertake the creation of intellectual property unless they expected some economic return. Therefore, patents, copyrights, and trademarks are used to give incentives for its creation. 1.

Protection of intellectual property rights is an important strategy for high-tech firms, and they may use lawsuits against competitors, both to stop actual violations and as a deterrent against future violations.

2.

The protection of intellectual property rights has been complicated in recent years due to digitalization, or the rendering of creative output in digital form, which is common today for artistic works and computer software.

3.

Digitalization lowers the cost of copying and distributing intellectual property, aided by the Internet, making the marginal costs almost zero.

4.

The low cost of copying and distributing creates an opportunity for piracy, the theft of intellectual property. Piracy is quite common in the

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Strategic Management computer software and music recording industries, costing each of those industries billions of dollars in lost sales annually. 5.

H.

Companies in the software and music industries don’t rely solely on legal protection—they also protect their works with encryption software. However, sophisticated pirates know how to defeat the encryption.

Digital rights can be effectively managed through the use of several tactics. 1.

One strategy relies on giving something away for free to boost sales of complementary products, just as companies do to win format wars.

2.

Another strategy is to keep prices so low that customers have little incentive to steal.

Capturing First-Mover Advantages Companies in high-tech industries strive to be a first mover, that is, the first to develop a new product. 3. First movers initially have a monopoly position, which can be very profitable if consumers adopt the new technology. 4.

Once a first-mover has been profitable with a new product, imitators rush into the market, lowering returns for all competitors.

Advantages of First-Movers: First movers have five key advantages. 5. They can exploit network effects and positive feedback loops. 6.

They can establish brand loyalty.

7.

They can increase production earlier than rivals, and thus benefit from cost savings due to scale economies and learning effects.

8.

They can create customer switching costs.

9.

They can accumulate valuable knowledge about customers, distribution, technology, and so on.

Disadvantages of First-Movers: First movers also have four potential disadvantages. 10. They have to bear the costs of initial development and marketing, called pioneering costs. Later entrants can free-ride on the pioneer’s investment. 11. They make more mistakes than do later entrants. 12. They risk building the wrong resources and capabilities, because they are focusing on an atypical customer segment, the innovators and early adopters. 13. They may invest in inferior technology. Later entrants may be able to leapfrog the first mover and introduce products based on a more sophisticated technology, due to the rapidly changing nature of the technology.

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Strategic Management

Exploiting First mover’s advantages: First movers can exploit their advantages in a number of ways. 14. In order to choose an appropriate strategy, the first mover must answer three key questions. Table 7.1 of the text summarizes the concepts presented in this section. a.

Does the company possess the complementary assets needs to exploit the new innovation? Complementary assets might include competitive, expandable manufacturing facilities, the ability to ride quickly down the experience curve, marketing know-how, access to distribution networks, a customer support network, and sufficient capital.

b.

What is the height of barriers to imitation? Barriers to imitation might include patents and a secret development process.

c.

Are there capable competitors that could rapidly imitate the innovation? Competitors are capable if they have excellent R&D skills and access to complementary assets.

15. The first mover can choose to develop and market the innovation itself, if the firm has complementary assets, barriers to imitation are high, and capable competitors are few. If this strategy can be sustained, it will lead to the highest level of profits—but it may not be possible. 16. The first mover can use a joint venture or strategic alliance to develop and market the innovation with other companies, if the firm lacks complementary assets, barriers to imitation are high, and there are several capable competitors. The joint venture partner should be a firm that possesses the required complementary assets. 17. The first mover can license the innovation to others and let them develop the market, if the firm lacks complementary assets, barriers to imitation are low, and there are many capable competitors. A modest licensing fee will discourage development of competing innovations. . Technological Paradigm Shifts Technological paradigm shifts occur when new technology revolutionizes the structure of an industry. This alters the nature of competition and requires the use of new strategies. An example is the current trend toward digital photography in replacing chemical photography. Paradigm shifts occur when an industry is mature, with technology approaching its “natural limit” and when a new technology has begun to be adopted by customers who are poorly served by the existing technology. 1. The technology S-curve (shown in Figure 7.5) describes the relationship between performance of a technology and time. Early on, new technologies improve rapidly in performance, but the effect diminishes over time, and ultimately approaches a natural limit beyond which only smaller, incremental improvements can be made.

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Strategic Management

Figure 7.5: The Technology S-Curve 2. When a technology approaches its natural limit, researchers begin to investigate possible alternative technologies, increasing the chances that a paradigm shift will occur. 3. This means that a technology that has just been developed will not be as useful as the existing technology, until after a period of refinement and improvement. Therefore, new technologies are sometimes mistakenly dismissed by competitors.

Figure 7.6: Established and Successor Technologies

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Strategic Management 4. In many situations, the old technology is dying out just as a host of new technologies are being developed. It’s often very difficult for established companies to decide which of the possible alternatives will ultimately be successful.

Figure 7.7: Swarm of Successor Technologies

Disruptive technologies: Clayton Christensen has developed a theory about disruptive technologies, or a new technology that gets its start away from the mainstream of the industry, and then invades the main market, causing a paradigm shift. 18. Christensen claims that established companies are often aware of the new alternatives, but they listen to their customers, and their customers don’t want the new technology, because it’s not yet efficient. 19. As the performance of the new technology improves, customers do want it, but it’s too late for the established firms to accumulate the technical knowledge in time to meet rising market demand. 20. Christensen identifies other factors that make it difficult for established firms to adopt a new technology, including the assumption that new technologies only serve a small market niche, the necessity of adopting a new business model, and the lack of a new network of suppliers and distributors. What can established companies do to remain competitive when disruptive technologies emerge? 21. Companies should understand the process of technological disruption, and particularly the rapidity with which a new technology can replace an older one. Awareness of the process could lead to better strategic decisions. 22. Established companies should invest in newly emerging technologies, hedging their bets by investing in several alternatives. They might also enter into joint ventures with new-technology companies, or acquire them. 23. Established companies should separate the new technology into its own autonomous division. This allows the new technology to develop in spite Department of Finance

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Strategic Management of what is often significant internal opposition. Autonomy also helps the division develop a new business model, with a radically different value chain.

What should new entrants do to gain an advantage of established enterprises? 24. New entrants must deal with problems such as the raising of capital, the management of rapid growth, and moving their technology from a small niche to a mass market. 25. Another concern of new entrants is the choice of whether to partner with an established company or go it alone.

What is different about high-tech industries? Were all industries once high tech? High-technology industries rely heavily on rapidly advancing scientific knowledge, whereas other industries’ technologies are more stable and evolve slowly and predictably. Thus, high-tech industries are unstable, chaotic, and prone to sudden disruption. The implications for managers are that high-tech firms must be extremely innovative, flexible, and forgiving of mistakes. Every technology was new at some point in human history, thus every industry was rapidly evolving and chaotic at some time. Even the wheel was a new technology— about 5500 years ago in ancient Mesopotamia. The astonishing new invention underwent several further refinements as it swept the known world, revolutionizing transportation.

Why are standards so important in many high-tech industries? What are the competitive implications of this? Standards are important in every industry, but in high-tech industries they are still evolving and thus require a great deal of managerial attention. The development of standards marks an important transition point in an industry, because after standards are developed, industry evolution will slow. Some early industry competitors may fail to adopt the new standard in time, and may exit the industry. Establishment of standards will draw new entrants, and for the first time price competition will become important. Managers also care about standards because the company that establishes the standard may be able to use that standard as a significant source of revenue. Thus, the establishment of standards will affect industry participants, the intensity of rivalry, the basis of rivalry, the strategies used by participants, and the industry’s profit potential. You work for a small company that has the leading position in an embryonic market. Your boss believes that the company’s future is assured because it has a 60 percent share of the market, the lowest cost structure in the industry, and the most reliable and highly-valued product. Write a memo to him outlining why his assumptions might be incorrect. In answering this question, students should focus on the following points: 1. The embryonic nature of the industry means that the technology is still undergoing major changes, and therefore the company cannot afford to be complacent, but must continue to innovate. Department of Finance

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Strategic Management 2. A high market share, low cost, and high-quality product is no guarantee of future success when the industry may experience rapid and drastic changes. In fact, the company’s early success may make it more difficult for them to adapt, when the large changes come. The manager should be warned not to continue to look for improvements and to monitor the actions of competitors closely. You are working for a small company that has developed an operating system for PCs that is faster and more stable than Microsoft’s Windows operating system. What strategies might the company pursue to unseat Windows and establish its new operating system as the dominant technical standard in the industry? There are several large hurdles that must be overcome if the company is to succeed with this highly risky strategy. To do this, the company could consider enlisting the aid of the government or other competitors in unseating Microsoft. Another strategy would be to encourage PC makers to install the new operating system, perhaps with a financial incentive. Another key need is for complementary products, and the firm should enable and encourage software developers in writing applications for use with the new operating system.

You are a manager for a major record label. Last year, music sales declined by 10 percent, primarily due to very high piracy rates for CDs. Your boss has asked you to develop a strategy for reducing piracy rates. What would you suggest that the company do? One strategy is to work to develop an encryption scheme that will reduce piracy, however, these are typically not very effective. In one recent case, Sony spent months developing a new CD encryption scheme, which consumers were able to defeat less than 24 hours after its release, with the simple use of an ordinary marking pen. Another strategy would be to give something away with each purchase, such as a poster or collectible, that can’t be easily duplicated. However, this strategy would be expensive to implement. A third possibility is to reduce the price so low that consumers are willing to pay for the convenience, however, this strategy may not be very profitable either.

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

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Chapter- 7 Corporate Strategy (Part-I)

Overview The principal concern of corporate strategy is identifying the business areas in which a company should participate, the value creation activities it should perform, and the best means for expanding or contracting businesses, in order to maximize its long-run profitability. To add value, a corporate strategy should enable one or more of a company’s business units to perform one or more of the value-creation functions at a lower cost or perform them in a way that allows differentiation and brings a premium price.

Horizontal Integration Horizontal integration is the process of acquiring or merging with industry competitors to achieve the competitive advantages that come with large scale and scope.

How does Horizontal integration can be achieved? 1. Horizontal integration may be achieved by acquisition, as when a company purchases another company, or by a merger, meaning an agreement by which equals pool their operations and create a new entity. 2. Horizontal integration has been a popular strategy since the early 1990s. The trend toward horizontal integration peaked in 2000 and has fallen off somewhat since then. 3. The net result of all the horizontal integration has been to increase the consolidation in many industries. Benefits of Horizontal integration: The popularity of this strategy is due to the benefits that horizontally integrated firms realize. 1. Horizontal integration allows companies to grow, and therefore to realize economies of scale. This is especially important in industries with high fixed costs. 2. Another benefit of horizontal integration is the cost savings due to reducing duplication between the two companies, for example, eliminating duplicate headquarters offices. 3. In addition, horizontal integration can allow the company to offer a wider range of products that can be sold together for a single price, a strategy called product bundling. Customers value the convenience of bundled products, leading to differentiation. Department of Finance

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4. Horizontal integration facilitates another strategy, similar to bundling, called a “total solution.” This is an important strategy, for example, in the computer industry, where corporate customers prefer the ease and coordination of purchasing all their hardware and service from a single source. 5. Horizontal integration also aids in value creation by supporting cross selling, as occurs when a company tries to leverage its relationship with customers by acquiring additional product categories that can be sold to them. Again, customers’ preference for convenience leads to differentiation. 6. Horizontal integration helps companies manage industry rivalry by reducing excess capacity in the industry. 7. Horizontal integration also reduces the number of players in an industry, thus making it easier to implement tacit price coordination. 8. Companies gain bargaining power over buyers and suppliers through horizontal integration, because industry consolidation increases the remaining firms’ power. This is called market power, or monopoly power.

Drawbacks and limitations of Horizontal integration: However, horizontal integration also has some drawbacks and limitations. 1. Mergers and acquisitions are difficult to implement successfully, and therefore may destroy value rather than creating it. Problems include disparate cultures, high management turnover, an underestimation of integration expenses, and a tendency to overestimate the expected benefits and to overpay. 2. Antitrust law is designed to provide protection against the abuse of market power and tends to favor industries with numerous, smaller companies rather than consolidated industries. The U.S. Justice Department sometimes blocks proposed mergers and acquisitions because of these concerns about reducing competition and raising prices for consumers.

Vertical Integration: Vertical integration means that a company is producing its own inputs (backward or upstream integration) or is disposing of its own outputs (forward or downstream integration). When a company expands its business into areas that are at different points on the same production path, such as when a manufacturer owns its supplier and/or distributor. Vertical integration can help companies reduce costs and improve efficiency by decreasing transportation expenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated. Examples of vertical integration include:  A mortgage company that both originates and services mortgages, meaning that it both lends money to homebuyers and collects their monthly payments.  A solar power company that produces photovoltaic products and also manufacturers the cells, wafers and modules to create those products would be considered vertically integrated.

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Stages in the raw material to customer value chain: ďƒ˜ There are four main stages in a typical raw-material-to-consumer production chain: raw materials; component part manufacturing; final assembly; and retail. For a company based in the assembly stage, backward integration involves moving into intermediate manufacturing and raw-material production. Forward integration involves movement into distribution.

Figure 9.1: Stages in the Raw Material to Consumer Value Chain ďƒ˜ At each stage in the chain value is added to the product. The difference between the price paid for inputs and the price at which the product is sold is a measure of the value added at that stage. Thus, vertical integration involves a choice about which value-added stages of the raw-material-to-consumer chain to compete in.

Full integration and Taper integration: Another important distinction is the difference between full integration, which occurs when a company produces all of its own inputs or disposes of all of its own output, and taper integration, in which a company buys from independent suppliers in addition to company-owned suppliers or when it disposes of its output through independent outlets in addition to company-owned outlets.

Figure 9.3: Full and Taper Integration

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Benefits of Vertical Integration: Firms pursuing a strategy of vertical integration realize some benefits. 1. By vertically integrating backward or forward, a company can build barriers to new entry, limiting competition and enabling the company to charge a higher price and make greater profits. 2. Vertical integration facilitates investment in specialized assets. A specialized asset is an asset that is designed to perform a specific task and whose value is significantly reduced in its next best use. 3. By protecting product quality, vertical integration enables a company to become a differentiated player in its core business, leading to more pricing options. 4. Strategic advantages arise from the easier planning, coordination, and scheduling of adjacent processes made possible in vertically integrated organizations. This can be particularly important in companies trying to realize the benefits of just-in-time inventory systems. The assumption underlying this argument is that scheduling is somehow more problematic between freestanding enterprises—an argument that seems rather dubious.

Disadvantages of vertical integration: However, vertical integration has some disadvantages. Because of these disadvantages, the benefits of vertical integration are not always as substantial as they might seem initially. 1. Although often undertaken to gain a production cost advantage, vertical integration can raise costs if a company becomes committed to purchasing inputs from company-owned suppliers when low-cost external sources of supply exist. 2. When technology is changing rapidly, vertical integration poses the hazard of tying a company to an obsolescent technology. Vertical integration can inhibit a company’s ability to change its suppliers or its distribution systems to match the requirements of changing technology. 3. Vertical integration can be risky in unstable or unpredictable demand conditions, because it may be difficult to achieve close coordination among vertically integrated activities. The resulting inefficiencies can give rise to significant bureaucratic costs. 4. Bureaucratic costs are the costs of running an organization. They include the costs arising from the lack of incentive on the part of company-owned suppliers to reduce their operating costs and from a possible lack of strategic flexibility in the face of changing technology or uncertain demand conditions.

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How vertical integration can raise any company’s cost: Although often undertaken to gain a production cost advantage, vertical integration can raise costs if a company becomes committed to purchasing inputs from companyowned suppliers when low-cost external sources of supply exist. 1. Company-owned suppliers might have high operating costs relative to independent suppliers because they know that they can always sell their output to other parts of the company. The fact that they do not have to compete for orders with other suppliers reduces their incentive to minimize operating costs. 2. The problem may be less serious, however, when the company pursues taper, rather than full, integration, because the need to compete with independent suppliers can produce a downward pressure on the cost structure of companyowned suppliers.

How Vertical integration facilitates investment in specialized assets: Vertical integration facilitates investment in specialized assets. A specialized asset is an asset that is designed to perform a specific task and whose value is significantly reduced in its next best use. It may be a tangible or an intangible asset.  Specialized assets lower the costs of value creation and provide better differentiation, and thus provide the basis for achieving a competitive advantage.  It may be difficult to persuade companies in an adjacent stage of the production chain to invest in specialized assets, because there is a risk that one will take advantage of the other, demanding more favorable terms after the companies commit to the relationship. This is referred to as holdup.  Instead, the company may vertically integrate and invest in specialized assets for itself.

Bureaucratic Costs and the limits of vertical integration: Bureaucratic costs are the costs of running an organization. They include the costs arising from the lack of incentive on the part of company-owned suppliers to reduce their operating costs and from a possible lack of strategic flexibility in the face of changing technology or uncertain demand conditions. (1) Bureaucratic costs place a limit on the amount of vertical integration that can be profitably pursued. The farther a company moves from its core business, the more marginal the economic value and the higher the bureaucratic costs. (2) Given their existence, it makes sense for a company to integrate vertically only when the value created by such a strategy exceeds the bureaucratic costs associated with expanding the boundaries of the organization to incorporate additional upstream or downstream activities.

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What problems arise when demands become Unpredictable: Vertical integration can be risky in unstable or unpredictable demand conditions, because it may be difficult to achieve close coordination among vertically integrated activities. The resulting inefficiencies can give rise to significant bureaucratic costs. (1) The problem involves balancing capacity among different stages of a process. For example, if demand falls, the company may be locked into a business that is running below capacity. Clearly, this would not be economical. (2) If demand conditions are unpredictable, taper integration might be somewhat less risky than full integration. When the company provides only part of its total input requirements from company-owned suppliers, in times of low demand it can keep its in-house suppliers running at full capacity by ordering exclusively from them.

Alternatives to Vertical Integration: Cooperative Relationships Under certain conditions, companies can realize the gains associated with vertical integration without having to bear the associated bureaucratic costs, if they enter into long-term cooperative relationships, called strategic alliances, with their trading partners.

Why companies will not realize gains from short-term contracts: Companies will not realize gains from short-term (less than one year) contracts with their trading partners. 1.

Because it signals a lack of long-term commitment to its suppliers by a company, the strategy of short-term contracting and competitive bidding makes it very difficult for that company to realize the gains associated with vertical integration.

2.

This is not a problem when there is minimal need for close cooperation between the company and its suppliers to facilitate investments in specialized assets, improve scheduling, or improve product quality. Indeed, in such cases competitive bidding may be optimal. However, a competitive bidding strategy can be a serious drawback when these considerations do arise.

What are the advantages of long term contracts? In contrast to short-term contracts, long-term contracts are cooperative arrangements by which one company agrees to supply the other, and the other agrees to continue purchasing from that supplier. 1. In a long-term contract, both parties make a commitment to work together and seek ways of lowering the costs or raising the quality of inputs. 2. This stable long-term relationship lets the participating companies share the value that might be created by vertical integration while avoiding many of its bureaucratic costs. Thus long-term contracts can be a substitute for vertical integration.

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What steps companies can take to ensure that a long term relationship can succeed? Companies can take some specific steps to ensure that a long-term relationship can succeed and to lessen the chances of one party taking advantage of the other. 3.

One way of designing long-term cooperative relationships to build trust and reduce the possibility of a company reneging on an agreement is for the company making investments in specialized assets to demand a hostage from its partner. This occurs when companies both invest in specialized assets in order to serve each other, and it makes them mutually dependent and therefore less likely to renege.

4.

A credible commitment is a believable commitment to support the development of a long-term relationship between companies. Credible commitments involve long-term and substantial investments, and therefore are believable guarantees of trust.

5.

Building a cooperative long-term relationship is more readily relied upon when a company can maintain some kind of market discipline on its partner, to ensure that the partner doesn’t lack incentives to maintain efficiency.

How a company can maintain some kind of market discipline: A company can maintain some kind of market discipline on its partner, to ensure that the partner doesn’t lack incentives to maintain efficiency. a.

One way of maintaining market discipline is to periodically renegotiate the agreement. Thus a partner knows that if it fails to live up to its side of the agreement the company may refuse to renew.

b.

Another way to maintain market discipline is to enter into long-term relationships with suppliers use a parallel sourcing policy. Under this arrangement, a company enters into a long-term contract with two suppliers for the same part. The idea is that when a company has two suppliers for a single part, each supplier knows that it must fulfill its side of the bargain, lest the company terminate the contract and switch business to the other supplier.

Strategic Outsourcing: I.

The opposite of integration (a firm’s growth, in number of businesses) is outsourcing value-creation activities to subcontractors. In recent years there has been a clear move among many enterprises to outsource noncore or nonstrategic activities.

J.

Any function can be outsourced, if it is not critical to a firm’s success (is not one of its distinctive competencies).

K.

Outsourcing begins with an identification of a firm’s distinctive competencies—these will continue to be performed within the company. All other activities are then reviewed to see whether they can be performed more effectively and efficiently by independent suppliers. If they can, these activities are outsourced to those suppliers. The relationships between the company

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Strategic Management and those suppliers are then often structured as long-term contractual relationships.

Figure 9.4: Strategic Outsourcing of Primary Value Creation Functions L.

The term virtual corporation has been coined to describe companies that have pursued extensive strategic outsourcing.

Advantages of strategic outsourcing: There are several advantages of strategic outsourcing. 1.

First, by outsourcing a noncore activity to a supplier who is more efficient at performing that particular activity, the company may reduce its own cost structure, enhancing its cost leadership strategy. a.

Suppliers may be more efficient due to economies of scale or learning effects.

b.

Suppliers may also be more efficient because of a low-cost location.

2.

By outsourcing a noncore value-creation activity to a supplier that has a distinctive competency in that particular activity, the company may be able to better differentiate its final product.

3.

A third advantage of strategic outsourcing is that it allows the company to remove distractions, focusing more resources on strengthening its distinctive competencies.

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Risks associated with strategic outsourcing: There are also some risks associated with strategic outsourcing. 4.

There is a risk of holdup, or becoming too dependent on an outsourced activity. a. b.

This risk can be reduced by outsourcing from several companies at once, using a parallel sourcing policy. Another way to manage this risk is simply to signal to the subcontractors the company’s willingness to choose a different provider when the contract is up for renewal.

5.

A further drawback of outsourcing is the potential for loss of control of scheduling. This problem is intensified by a long supply chain, unpredictable demand, and outsourcing to a number of competing companies, rather than just one.

6.

Another concern is the potential for a loss of important competitive information. This risk can be managed by ensuring good communication between the subcontractor and the company.

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

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Chapter- 7 Corporate Strategy (Part-II)

Overview: This chapter is the second chapter that deals with corporate strategy, and focuses on diversification, the process of adding new businesses to the company that are distinct from its established operations. Thus, a diversified company is involved in two or more distinct businesses. Another focus is on the execution of a diversification strategy. This might take place through internal new venturing, which is starting a business from scratch; acquisition, or buying an existing business; and joint ventures established with the help of a partner. A third topic is restructuring, the opposite of diversification, in which a company reduces the scope of its operations by exiting industries.

Expanding Beyond a Single Industry: Corporate-level managers identify which industries a company should compete in to maximize long-run profitability.

What are the advantages of competing within a single industry? Often, it is better to compete within a single industry. 1. One advantage of a single business corporation is the ability to focus more resources and attention on that one area. 2. Another advantage is that a firm sticks with what it knows and does best, and does not risk making the mistake of moving into areas in which it has no distinctive competencies.

What are the disadvantages of competing within a single industry? There are also disadvantages to a single-business strategy. 1. One disadvantage is the increased risk that comes from tying corporate profitability to just one industry. 2. Another disadvantage is that a firm may miss out on opportunities to further leverage its distinctive competencies.

A company as a portfolio of distinctive competencies: One model of a corporation looks at the firm as a portfolio of distinctive competencies, rather than a portfolio of products. Managers can then consider how to leverage those competencies.

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Establishing a Competency Agenda:

Hamel and Prahalad claim that, once a firm has identified its current competencies, it should use a matrix, such as the one presented in Figure 10.1, to establish an agenda for building and leveraging competencies to create new businesses.

Figure 10.1: Establishing a Competency Agenda 1. The lower left corner of the matrix represents the company’s current portfolio of competencies. This quadrant is called “fill-in-the-blanks” because the recommended strategy here is to transfer existing competencies in order to improve its position in existing industries. 2. The upper left matrix quadrant is called “premier plus 10,” to suggest that managers must be building new competencies today to ensure that the firm is a premier provider ten years from now. 3. The lower left quadrant is “white spaces,” and it indicates the firm’s search for new industries where its existing distinctive competencies could be deployed through diversification. 4. The upper left quadrant is referred to as “mega-opportunities,” and it represents opportunities for entry into new industries where the company currently has none of the required competencies. 5. Use of this matrix helps managers think strategically about competencies and industries as they change over time. Managers who use this matrix will be unlikely to enter new markets where they do not have a competitive advantage.

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How to develop business model when companies wish to expand beyond a single industry: Companies that wish to expand beyond a single industry must develop their business model at two levels. 1. Developing a business model for each industry: First, they must develop a business model for each industry in which they plan to compete. 2. Developing a higher-level multibusiness model: Then, the company must develop a higher-level multibusiness model that justifies entry into different industries in terms of profitability. This model should describe how the firm plans to leverage its distinctive competencies across industries. The model must also describe how the business and corporate strategies boost profitability.

Increasing Profitability through Diversification: M.

Diversification is the process of adding new businesses to the company that are distinct from its established operations. Thus, a diversified company is involved in two or more distinct businesses.

N.

To increase profitability, diversification should allow the company to lower costs, differentiate its products, or better manage industry rivalry.

O.

When the firm is generating free cash flow, that is, profits about the level necessary to meet current expenses and obligations, the firm’s managers may choose to return dividends to shareholders or to invest the cash in diversification.

P.

For diversification to make economic sense, the expected return on invested capital (ROIC) from the diversification must exceed the returns shareholders could realize through investing that capital in a diversified investment portfolio.

Leveraging competencies: ďƒ˜ Leveraging competencies involves creation of a new business, whereas transferring competencies involves an existing business. This distinction is important because the two different situations require the use of different managerial skills. ďƒ˜ Companies that leverage competencies tend to use R&D skills to build a new venture in a technology-related industry, whereas companies that transfer competencies tend to acquire established businesses.

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

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Using diversification how companies can boost profitability: 1.

One way that firms use diversification to boost profitability is through their ability to transfer their existing distinctive competencies to an existing business in another industry. The transfer must involve competencies that are important for competitive advantage in that business.

Figure 10.2: Transfer of Competencies at Philip Morris 2.

Another way of boosting profitability requires that the company leverage its existing distinctive competencies by using them to create a new business in a different industry.

3.

Another way to use diversification to increase profitability is through sharing resources across multiple businesses in order to obtain cost reductions. This sharing is called economies of scope.

4.

Diversification can also boost profitability by enabling the company to better manage rivalry through the use of multipoint competition.

5.

A final way that profitability can increase due to diversification is through the improved use of general organizational competencies, that is, corporatelevel competencies that transcend individual functions or businesses.

Economies of scope: Through sharing resources across multiple businesses in order to obtain cost reductions, diversification is called economies of scope. 1. Economies of scope occur because each business can invest less in the shared resource than in resources that are not shared. 2. Economies of scale generate economies of scope, because resource sharing allows the company to use the resource more intensively. 3. Economies of scope are obtained only when there is significant commonality between one or more value creation functions in the two businesses.

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Figure 10.3: Sharing Resources at Procter & Gamble 4. Also, managers must weigh the benefits obtained by resource sharing against the increased bureaucratic costs of doing so.

Managing Rivalry: The companies can better manage rivalry through the use of multipoint competition. 1. Multipoint competition occurs when two companies rival each other in more than one industry. 2. The threat of increasing competitive rivalry in one industry can keep a competitor from entering another industry or can cause the competitor to lessen the intensity of competitive pressure.

General organizational competencies: General organizational competencies are corporate-level competencies that transcend individual functions or businesses. 1. General organizational competencies require the use of rare managerial skills and are difficult to develop and implement. 2. One general organizational competency is an entrepreneurial capability, which allows managers to recognize and develop new businesses internally. Companies with this competency are skilled at encouraging risk taking while also limiting the amount of risk undertaken. 3. Another general organizational competency is the ability to develop effective organization structure and controls. 4. Another general organizational competency is a superior strategic capability, such that top managers have good governance skills and can effectively manage the firm’s business-level managers.

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Effective organization structure and controls: 1. Effective structure and controls encourage business-level managers to maximize efficiency and effectiveness, increasing profitability. 2. Companies with effective structure and controls tend to use self-contained business divisions. 3. Companies with effective structure and controls tend to be decentralized. 4. Companies with effective structure and controls tend to link pay to performance.

Superior strategic capability: Superior strategic capability requires that top managers have good governance skills and can effectively manage the firm’s business-level managers. 1. One aspect of superior strategic capability is a flair for entrepreneurship. 2. Superior strategic capability also expresses itself in an ability to recognize ways to improve the performance of individuals, functions, and businesses. 3. Another aspect of effective governance is the ability to diagnose the real source of problems and then to know the appropriate steps to take to fix those problems. 4. Superior strategic capability is at work when a diversified company acquires a new business and then restructures it to improve performance.

Types of Diversification: Q.

Related diversification: Related diversification moves the company into a new activity that is linked to its existing activity by a commonality between value chain activities. 1. Typically, the commonality lies in the manufacturing, marketing, and technology functions. 2. Typically, firms pursuing a strategy of related diversification expect to benefit from transferring and leveraging competencies and from sharing resources. 3. Also, companies pursuing a strategy of related diversification are likely to encounter their rivals in several related industries and thus are likely to benefit from managing that rivalry through multipoint competition.

R.

Unrelated diversification: Unrelated diversification moves the company into a new activity that has no obvious commonalities with any of the company’s existing activities. 1. Typically, firms expect to benefit from unrelated diversification through the exploitation of general organizational competencies. 2. Typically, firms pursuing unrelated diversification are unlikely to meet their rivals in more than one industry, and thus are unlikely to benefit from managing rivalry through multipoint competition.

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The Limits of Diversification:

1. Diversification, in many cases, can dissipate value instead of creating it. 2. One reason for the failure of diversification to achieve its goals is that the bureaucratic costs of diversification exceed the value created by it. 3. Another reason that companies fail to realize the expected benefits of a diversification is that companies make an inappropriate choice between related and unrelated diversification. 4. Another reason for the failure of a diversification strategy to meet its objectives is that many companies diversify for the wrong reasons, and end up dissipating value rather than creating it.

How Diversification dissipate value instead of creating it? 1.

Although related diversification has more ways to increase profitability and seems to involve fewer risks, research has shown that related firms achieve profits that are only slightly higher than unrelated firms.

2.

Firms that are extensively diversified, with many businesses, tend to be less profitable.

3.

A study by Michel Porter found that over time, companies divested many more of their acquisitions than they kept.

Discuss about the bureaucratic costs of diversification. 4.

The level of bureaucratic costs is a function of the number of businesses in a company’s portfolio. a.

The greater the number of businesses, the more difficult it is for managers to remain informed about the complexities of each business. They simply do not have the time to process all the information.

(1) Therefore, corporate-level managers end up making important decisions based on a superficial analysis of each business. (2) Corporate managers’ lack of familiarity with operations increases the probability that business-level managers will be able to distort information provided to those at the corporate level.

5.

b.

Thus, information overload can result in substantial inefficiencies within extensively diversified companies.

c.

In order to overcome information overload, some corporate managers limit the extent of diversification at their firms.

Another source of bureaucratic costs is the coordination required to realize value from transferring competencies and resource sharing. a.

Bureaucratic costs arise from an inability to identify the unique profit contribution of a business unit that is sharing resources and functions with another unit.

b.

This problem can be resolved if corporate management directly audits both divisions, however, doing so requires both time and effort from corporate managers.

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Figure 10.4: Coordination among Related Business Units c.

6.

The accountability problem is far more serious at companies that are extensively diversified. Information overload occurs and corporate management effectively loses control of the company.

Thus, bureaucratic costs, which increase as a function of the number of businesses and the extent of resource sharing, place a limit on the value created by diversification. If a company continues to diversify after the point at which costs exceed benefits, profitability will decline. Then, divestment is the best solution.

Make comparison between related and unrelated diversification. 7.

Although the ways that related diversified companies can create value are more numerous, the bureaucratic costs of a related strategy are higher than those of an unrelated strategy. Thus, related firms may be no more profitable than unrelated firms.

8.

Related diversification should be chosen when the firm’s distinctive competencies in its core business have commonalities with the competencies required to compete in other businesses, and when the bureaucratic costs of implementation do not exceed the value created through resource sharing.

9.

A company should pursue unrelated diversification when its distinctive competencies are highly specialized and have few applications outside the core business, when top management possesses super strategic capabilities, and when the bureaucratic costs of implementation do not exceed the value created through restructuring.

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

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Entry Strategy: Internal New Ventures Internal new venturing is one method that companies can use to execute a corporatelevel diversification strategy.

What are the reasons behind using internal new venturing? Internal new venturing is an appropriate strategy to use for several reasons. 10. Internal new venturing is used when a company possesses a set of valuable competencies in its existing businesses that can be leveraged or recombined to enter the new business area. 11. Science-based companies that use their technology to create market opportunities in related areas tend to favor internal new internal venturing. 12. Even if it lacks the competencies required to compete in a new business area, a company may use internal new venturing to enter a newly emerging or embryonic industry where there are no established players that possess the competencies required to compete in that industry. Thus, internal new venturing is the only option.

What are the drawbacks of using internal new ventures? There are some drawbacks to the use of internal new ventures, which have a very high failure rate. 13. Large-scale entry into a new business is more likely to be successful than is small-scale entry, because it entails greater short-term costs, but gives greater returns in the long run. This is due to the greater economies of scale, brand loyalty, and access to distribution channels that large firms enjoy. The effect is especially noticeable when a firm is entering an established industry with powerful incumbents.

Figure 10.5: Scale of Entry, Profitability, and Cash Flow

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Strategic Management 14. Another concern with internal new ventures is that a company can become blinded by the technological possibilities of a new product and fail to analyze market opportunities properly, leading to poor commercialization. Successful commercialization requires that there be a market demand for the technology. 15. Internal new ventures can also fail due to a poor implementation. Common mistakes here include pursuit of too many ventures at once leading to strained resources, failure to ensure the strategic value of the venture beforehand, and failure to anticipate the tie-and-cost demands—leading to an unrealistic profit expectation.

To avoid the drawbacks of using internal new ventures, what guidelines managers can follow to reduce the risk of new venture failure? To avoid the above pitfalls, managers can follow a number of guidelines to reduce the risk of new venture failure. 16. A company should use a structured approach to new venture development, including both exploratory (basic) research and development research. 17. Another way to increase the probability of new venture success is to foster close links between R&D and marketing and R&D and manufacturing. 18. Another strategy is to devise a selection process for choosing only the ventures that demonstrate the greatest probability of commercial success. 19. To ensure success, managers must also monitor the new venture closely, focusing on market share rather than on profit goals for the first few years. Large market share facilitates economies of scale and learning effects, which will ultimately lead to superior profitability. 20. Finally, companies can help to ensure new venture success by thinking big. They should look for products that have high potential demand, construct efficient-scale manufacturing plants ahead of need, and spend generously on marketing. These steps will help to lead to high market share and profitability.

Foster close links: Another way to increase the probability of new venture success is to foster close links between R&D and marketing and R&D and manufacturing. a.

Project teams with members from the various functional areas are an effective way to foster close links.

b.

These teams can also significantly reduce product development time.

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Exploratory (basic) research: c.

Good basic research comes from strong ties to university research communities and from giving researchers enough resources to pursue “bluesky� projects of their own choosing.

d.

However, basic research alone will not lead a successful commercial venture.

Development research: a. Good development research also requires resources to be given to business-level managers, who are ideally situated to recognize commercially viable technologies. b. Good development research also requires communicating company strategies and goals to researchers, so that their research will be relevant to those goals.

Entry Strategy: Acquisitions Acquisitions are the main strategy for implementing horizontal integration, and they are also used in vertical integration and diversification strategies.

What are the advantages of Acquisition? Acquisition is an appropriate strategy to use for several reasons. 21. A company can use acquisition to enter a new business area when they lack important competencies required in that area, and they can purchase an incumbent company that has those competencies at a reasonable price. 22. Acquisition is a quick way to establish a significant market presence and generate profitability. 23. Acquisitions are perceived to be somewhat less risky than internal new ventures, because they involve less uncertainty. When a company makes an acquisition, it is acquiring known profitability, revenues, and market share; thus it reduces uncertainty. 24. Acquisition is a good entry mode when the industry to be entered is well established with high barriers to entry. The greater the barriers to entry, the more likely it is that acquisitions will be the favored entry mode. What are the drawbacks of Acquisition? There are some drawbacks to the use of acquisition, which have a high failure rate and often dissipate value instead of creating it. 1.

A challenge for acquiring firms is to smooth post acquisition integration of the two companies. Unanticipated problems often occur when an attempt is made to marry two divergent corporate cultures. This can lead to high management turnover and can depress profitability.

2.

Another challenge is that companies often overestimate the potential for creating value by joining together different businesses. They overestimate the strategic advantages of the acquisition and thus overpay for the target company. Richard Roll attributes this to top management hubris.

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Strategic Management 3.

Another drawback relates to the price of acquisitions, which tend to be very expensive. Stockholders of the target company do not want to sell unless they are offered a premium price. In addition, several bidders are sometimes pursuing the same target company, bidding up the price to result in a typical increase in market value of 40 to 80 percent.

4.

Another drawback is that, when firms overpay for the acquisition, the resulting debt can depress company profits.

5.

Yet another drawback is that many companies make acquisition decisions without thoroughly analyzing the potential benefits and costs. As a consequence, after the acquisition is complete, many acquiring companies find that they have purchased a troubled organization instead of a well-run business.

To avoid the drawbacks of using acquisition strategy, what guidelines managers can follow to reduce the risk of new venture failure? To avoid the above pitfalls, managers can follow a number of guidelines to reduce the risk of acquisition failure. 1. Screening of acquisition targets: Thorough screening of acquisition targets leads to a more realistic assessment of the costs and benefits of an acquisition. a. The company should begin with an assessment of the strategic rationale for the acquisition and identify the types of companies that would make good candidates. b.

Next, the company should scan the target population, assessing such items as finances, management capabilities, and corporate culture.

c.

Then, favorable targets should be identified and evaluated more thoroughly. This may involve talking to third parties, as well as performing a detailed audit, if the acquisition is a friendly one.

2. Good bidding strategy: Good bidding strategy help to reduce risk because it can reduce the price of an acquisition. d. Friendly takeovers are more likely to have a favorable price. e.

The timing of the acquisition is also important. Essentially sound businesses that are suffering from short-term or localized problems are usually undervalued.

3. Integration: Taking positive steps to quickly integrate the acquired business into the company’s organizational structure is also key to an acquisition’s success. f. Integration should focus on the source of the expected competitive advantages. g.

Integration should be accompanied by elimination of any duplication of assets or functions.

4. Previous experience: Acquirers should also take steps to learn from previous experience with acquisitions.

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Strategic Management

Entry Strategy: Joint Ventures Joint ventures are used as a diversification mode less frequently than are internal new ventures and acquisitions.

What are the advantages of Joint Ventures? Joint venture is an appropriate strategy to use for several reasons. 6.

Joint ventures are particularly appealing when a firm wishes to enter an embryonic or emerging market, but hesitates to commit the resources. Joint ventures allow two or more companies to share the risks of a new business.

7.

Companies use joint ventures when they possess some of the skills and assets needed by the new business, but not all. They can team up with a firm with complementary skills to increase the probability of success.

What are the drawbacks of Joint Ventures? There are some drawbacks to the use of joint ventures. 1.

Although a joint venture allows a company to share the risks and costs of developing a new business, it also means that it must share the profits if the new business is successful.

2.

By definition, in the case of a joint venture, control must be shared with the venture partner. This can lead to substantial problems if the two companies have different business philosophies, time horizons, or investment preferences. Conflicts over how to run the joint venture can tear it apart and result in business failure.

3.

When a company enters into a joint venture, it always runs the risk of giving away critical know-how to its joint-venture partner.

Restructuring: Restructuring, or strategies for reducing the scope of the company by exiting from business areas, is the opposite of diversification, which increases scope. Restructuring is becoming increasingly popular among firms that diversified in the 1980s and 1990s.

What factors are responsible for occurring Restructuring? Restructuring occurs in response to several factors. 4.

In recent years, investors have assigned a diversification discount to highly diversified companies, meaning that their stock was undervalued as compared to the stock of less diversified firms. a.

Investors are deterred by the complexity and lack of transparency in the financial statements of highly diversified firms, leading to an increased risk for the investment.

b.

Investors have learned from experience that many companies over diversify, or diversify for the wrong reasons, leading to lower profitability.

c.

Therefore, companies have restructured in order to split the company and increase returns to shareholders.

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Strategic Management 5.

Restructuring can be a response to failed acquisitions.

6.

Due to innovations in management processes and strategies, the advantages of being vertically integrated or diversified have diminished, and so companies are restructuring.

What strategies Companies use to implement restructuring? Companies use a variety of strategies to implement restructuring, that is, to exit a business. 7. Divestment: Divestment is the best way for a company to recoup as much of its initial investment in a business as possible. The idea is to sell the business unit to the highest bidder. There are three types of buyers. a.

Selling a business to independent investors is referred to as a spinoff. A spinoff makes good sense when the unit to be sold is profitable and the stock market is looking for new stock issues.

b.

Selling off a unit to another company is another strategy. The buyer is often a competitor in the same line of business. In such cases, the purchaser may pay a considerable amount of money for the opportunity to substantially increase the size of its business immediately.

c.

Selling off a unit to its management is normally referred to as a management buyout (MBO). In an MBO, management finances the purchase through the sale of high-yield bonds to investors. In recent years, the lack of investors interested in high-yield, high-risk bonds (also called junk bonds), has made it difficult to carry out any MBOs.

8. Harvest strategy: A harvest strategy is implemented when a company ceases investment in a business, but continues to “harvest” profits from it for as long as possible. a.

Although this strategy sounds nice in theory, it is often a poor one to pursue in practice because the morale of the unit’s employees, as well as the confidence of the business’s customers and suppliers in its continuing operation, can all decline rapidly once it becomes apparent that the business is pursuing a harvest strategy.

b.

Therefore, the rapid decline in the business’s revenues can make the strategy untenable. This strategy is thus much less desirable than a divestment strategy.

9. A liquidation strategy: A liquidation strategy requires a company to cease operations in that business and sell its assets. a.

A liquidation strategy is the least attractive of all to pursue because the company has to write off its investment in a business unit—often at a considerable cost.

b.

Liquidation is much less desirable than either a divestment or a harvest strategy.

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Chapter- 8 Implementing Strategy

The Causes of Poor Performance: Virtually every industry contains some firms, and in some industries, many firms, that are not profitable—that is, whose returns do not exceed their cost of capital. There are six causes of persistent poor performance that are found in many organizations. When organizations are declining, typically they are experiencing several of these factors simultaneously. 1. Poor management: Poor management is a cause of persistent poor performance, and it covers a variety of problems, from neglect to outright incompetence. a. Poor managers are too dominant, autocratic, or overly-ambitious. b. Another characteristic of poor managers is trying to do too much by them, rather than delegating appropriately. c. Other characteristics include the lack of a succession plan, failure by the board of directors, or a lack of strong middle managers. d. Poor managers sometimes execute strategies that are designed to enrich themselves, rather than the firm’s shareholders. 2. High cost structure: Another hallmark of poorly-performing organizations is a high cost structure, which is often due to low labor or capital productivity. a. Low labor productivity stems from union work restrictions, lack of investments in labor-saving technology, or lack of employee incentives. b. Low capital productivity is caused by failure to fully use the company’s fixed assets, such as occurs when a firm has low economies of scale or holds too much inventory. c. Low productivity is usually tied to deeper problems, such as lack of accountability for financial returns. 3. Lack adequate differentiation: Companies whose products lack adequate differentiation will suffer from low performance. a. Poor product quality or lack of attractive product attributes contributes to lack of differentiation. b. Lack of differentiation can usually be traced to deeper problems, such as a failure to implement cross-functional product development teams or failure to implement quality improvement processes.

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Strategic Management 4. Overexpansion: Another contributor to poor performance is overexpansion, which occurs when a company tries to move into too many diversified industries too quickly. a. Overexpansion often results when an autocratic CEO tries an empire-building strategy, with poorly conceived diversification leading to disappointing results. b. Overexpansion also tends to raise a company’s debt burden rapidly, and that may be untenable, particularly if economic conditions decline. 5. Structural shift: Poor performance arises when industries experience a structural shift, that is, a shift in demand that is permanent, often brought on by technological, economic, or social changes. a. These shifts revolutionize industry dynamics and threaten existing firms (although they also create opportunities for new entrants). b. Structural shifts are difficult to predict and the entrance of new competitors creates significant upheaval for existing firms. 6. Organizational inertia: Organizational inertia also plays a role in poor performance, because it slows the firm’s response to changes and problems. a. The existing distribution of power within a firm causes individual managers to resist change, leading to organizational inertia. b. Deeply-held values and norms can provide benefits to the firm, but they can also be very hard to change, contributing to inertia. c. Managers’ preconceptions about their firm’s business model may go unchallenged, creating an inability to see the need for change, and thus leading to inertia.

How can a company improve its performance? 1. Through changing leadership most of the companies attempt to improve performance. 2. Changing strategy is another common tactic to improve performance. 3. Firms can also improve performance through a change in the organization.

Improving Performance through changing leadership: Most companies that are attempting to improve performance change leadership. 7.

The old leaders are seen as contributing to the problems, whereas new leaders from outside the company will bring in fresh perspectives and ideas, overcoming preconceptions.

8.

The new leaders must be able to make difficult decisions, motivate and listen to others, and delegate when appropriate.

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Improving Performance through changing strategy: Changing strategy is another common tactic to improve performance. 9.

Strategy must first be evaluated and redefined, if necessary. For a singlebusiness firm, redefining the strategy means changes in the generic businesslevel strategy. For diversified firms, it means re-evaluating and balancing the firm’s portfolio of businesses.

10. Next, a firm must divest or liquidate any assets that do not contribute to the new strategy. The resulting cash can be used to improve the remaining operations. 11. Then a firm should focus attention on improving efficiency, quality, innovation, and responsiveness to customers. (This was described in detail in Chapter 4.) This will involve activities such as lying off excess employees, reengineering processes, and introducing total quality management programs. 12. Acquisitions can also be used to improve performance, if the acquired company strengthens the firm’s competitive position in its core operations.

Improving Performance through changing in organization: Firms can also improve performance through a change in the organization. 1. Unfreezing the company: The first step in organizational change is to “unfreeze” the company, that is, to shock the employees in such a way that they understand and agree with the necessity for change. a.

Reorganizations or plant closings are often used as a way to signal the need for change to employees.

b.

The commitment of senior managers—as evidenced by both their words and their actions—facilitates lower-level employees making the change.

2. Moving into its desired state: After the organization is shocked into unfreezing, it can be moved into its desired state. c.

Moving the organization requires actions, such as redesigning processes, reorganizing the structure, reassigning responsibilities, new control and reward systems, firing people who refuse to change, and so on.

d.

The changes must be substantial, in order to have an important impact on performance, and they must be rapid, to ensure success.

3. Refreezing the company: Refreezing, or making the new way of doing business the firm’s established practice, follows movement. e.

Management education programs, hiring individuals whose values support the new state of the organization, and implementing consistent control and reward systems are all part of refreezing.

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Strategic Management f.

Senior leaders must be consistent in their words and actions throughout the entire change and refreezing period. Also, they must be patient because changing an organization’s values and culture takes time.

Stakeholders and Corporate Performance: Stakeholders are individuals or groups with an interest, or stake, in a firm. There are two types of stakeholders related to a firm. 1. Internal stakeholders include stockholders and employees at all levels. 2. External stakeholders are all other groups, and typically include customers, suppliers, creditors, governments at all levels, unions, local communities, and the general public.

Figure 11.1: Stakeholders and the Enterprise

Discuss about stakeholders ďƒ˜ Stakeholders are in a reciprocal relationship with the firm, providing the organization with resources and expecting some benefit in return. 1. Each stakeholder group has a unique relationship with the firm. a.

Stockholders provide funds and expect returns.

b.

Creditors provide funds and expect repayment and interest.

c.

Employees provide labor, skills, and ideas, and expect income, job satisfaction and security, and good working conditions.

d.

Customers provide sales revenues and expect products that provide value for money.

e.

Suppliers provide inputs and expect revenues and dependable buyers.

f.

Governments provide regulation and expect companies to adhere to the rules.

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Strategic Management g.

Unions provide productive employees and expect income and other benefits for their members.

h.

Local communities provide local infrastructure and expect companies to behave as responsible citizens.

i.

The general public provides national infrastructure and expects the company to improve their quality of life.

2. Companies that neglect to satisfy the needs of one or more important stakeholder groups will find that the stakeholders withdraw their support, damaging the firm.  A company cannot fully satisfy all of its stakeholders at the same time. To understand stakeholder needs and to develop effective strategies for satisfying those needs, companies use stakeholder impact analysis. 3. To begin a stakeholder impact analysis, a company must first identify stakeholder groups, along with their interests and concerns. 4. Next, a company must identify the claims that each stakeholder group is likely to make on the organization. 5. Then, a company must decide the relative importance of each stakeholder group, from the company’s perspective. 6. This process will result in an identification of some critical strategic challenges. 7. Based on this process, most firms identify the three most important stakeholder groups as customers, employees, and stockholders.  Among stakeholders, stockholders’ position is unique because the stockholders are the legal owners of the firm as well as the providers of funds. Their unique position leads to an emphasis on satisfying the needs of this key stakeholder group. 8. The money provided by stockholders is called risk capital, because the stockholders are making a risky investment in the firm with no guarantee of returns or even the preservation of their original investment. 9. Because of their willingness to assume risk, managers are obliged to reward stockholders by pursuing strategies that maximize returns to them. 10. When employees become stockholders too, for example through employee stock ownership plans (ESOPs), the importance of maximizing stockholder return grows.  Companies can satisfy stakeholder claims by increasing profitability.  Managers can best serve the interests of stockholders (the most important group of stakeholders) by increasing profitability. a.

Stockholders receive returns as dividends and as appreciation in share value.

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Strategic Management b.

Increasing profitability (that can be measured by ROIC) tends to both increase the funds available for dividends and to drive up the value of the stock.

ďƒź Profitability satisfies the claims of several other stakeholder groups, in addition to stockholders. c.

Higher profits generate more funds for paying high salaries and offering more benefits to employees.

d.

Higher profits generate more funds for satisfying debt obligations to creditors.

e.

Higher profits generate more funds for philanthropic activities, which benefit local communities and the general public.

ďƒź The cause-and-effect relationship between profitability and satisfying stakeholder claims shows that profitability must be the cause, leading to the ability to satisfy. f.

If the relationship works in the opposite direction, where stakeholders must first be satisfied before the firm can be profitable, the results are overly high costs and no guarantee that the firm can bear those costs.

g.

Once a company is profitable, then it can satisfy stakeholders. In return, satisfied stakeholders provide more generously for the firm, which leads to further increases in profitability. Thus the process is a self-reinforcing cycle. See Figure 11.2 for a graphic depiction of the process.

Figure 11.2: Relationship Between ROIC, Stakeholder Satisfaction, and Stakeholder Support ďƒź Not all stakeholder groups are satisfied by high profitability.

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Strategic Management h.

Suppliers want to sell to a profitable company, because it will pay for what it receives. Customers want to buy from a profitable company that will exist long enough to provide customer service and additional sales. However, neither group wants the firm to profit at their expense.

i.

Governments expect every company to make profits only within the limits set by law. The general public expects companies to profit in a manner consistent with societal expectations.

j.

Every stakeholder group disapproves of the unfettered pursuit of profit, if it leads to unethical or illegal behavior.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com Mobile: 01198150195 http://jagannath.academia.edu/jony007ex

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

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Strategic Management

Shortcut Learning Summary of Chapter-1 1. A strategy is a set of related actions that managers take to increase their company’s performance goals. 2. The major goal of a company is to maximize the returns that shareholders get from holding shares in the company. To maximize shareholder value, managers must pursue strategies that result in high and sustained profitability and also in profit growth. 3. The profitability of a company can be measured by the return that it makes on the capital invested in the enterprise. The profit growth of a company can be measured by the growth in earnings per share. Profitability and profit growth are determined by the strategies managers adopt. 4. A company has a competitive advantage over its rivals when it is more profitable than the average for all firms in its industry. It has a sustained competitive advantage when it is able to maintain above-average profitability over a number of years. In general, a company with a competitive advantage will grow its profits more rapidly than its rivals will. 5. General Managers are responsible for the overall performance of the organization or for one of its major self-contained divisions. Their overriding strategic concern is for the health of the total organization under their direction. 6. Functional managers are responsible for a particular business function or operation. Although they lack general management responsibilities, they play a very important strategic role. 7. Formal strategic planning models stress that an organization’s strategy is the outcome of a rational planning process. 8. The major components of the strategic management process are defi ning the mission, vision, values, and major goals of the organization; analyzing the external and internal environments of the organization; choosing a business model and strategies that align an organization’s strengths and weaknesses with external environmental opportunities and threats; and adopting organizational structures and control systems to implement the organization’s chosen strategies. 9. Strategy can emerge from deep within an organization in the absence of formal plans as lower-level managers respond to unpredicted situations. 10. Strategic planning often fails because executives do not plan for uncertainty and ivory tower planners lose touch with operating realities. 11. In spite of systematic planning, companies may adopt poor strategies if their decisionmaking processes are vulnerable to groupthink and if individual cognitive biases are allowed to intrude into the decision-making process. 12. Devil’s advocacy, dialectic inquiry, and the outside view are techniques for enhancing the effectiveness of strategic decision making. 13. Good leaders of the strategy-making process have a number of key attributes: vision, eloquence, and consistency; ability to craft the business model; commitment; being well informed; a willingness to delegate and empower; political astuteness; and emotional intelligence.

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Summary of Chapter-2

1. An industry can be defined as a group of companies offering products or services that are close substitutes for each other. Close substitutes are products or services that satisfy the same basic customer needs. 2. The main technique used to analyze competition in the industry environment is the five forces model. The five forces are (a) the risk of new entry by potential competitors; (b) the extent of rivalry among established firms; (c) the bargaining power of buyers; (d) the bargaining power of suppliers; and (e) the threat of substitute products. The stronger each force is, the more competitive the industry and the lower the rate of return that can be earned. 3. The risk of entry by potential competitors is a function of the height of barriers to entry. The higher the barriers to entry are, the lower is the risk of entry and the greater the profits that can be earned in the industry. 4. The extent of rivalry among established companies is a function of an industry’s competitive structure, demand conditions, cost conditions, and barriers to exit. Strong demand conditions moderate the competition among established companies and create opportunities for expansion. When demand is weak, intensive competition can develop, particularly in consolidated industries with high exit barriers. 5. Buyers are most powerful when a company depends on them for business but they themselves are not dependent on the company. In such circumstances, buyers are a threat. 6. Suppliers are most powerful when a company depends on them for business but they themselves are not dependent on the company. In such circumstances, suppliers are a threat. 7. Substitute products are the products of companies serving customer needs similar to the needs served by the industry being analyzed. The more similar the substitute products are to each other, the lower is the price that companies can charge without losing customers to the substitutes. 8. Some argue for a sixth competitive force of some significance: the power, vigor, and competence of complementors. Powerful and vigorous complementors may have a strong positive impact on demand in an industry. 9. Most industries are composed of strategic groups: groups of companies pursuing the same or a similar strategy. Companies in different strategic groups pursue different strategies. 10. The members of a company’s strategic group constitute its immediate competitors. Because different strategic groups are characterized by different opportunities and threats, it may pay a company to switch strategic groups. The feasibility of doing so is a function of the height of mobility barriers. 11. Industries go through a well-defined life cycle: from an embryonic stage, through growth, shakeout, and maturity, and eventually decline. Each stage has different implications for the competitive structure of the industry, and each gives rise to its own set of opportunities and threats. 12. The five forces, strategic group, and industry life cycles models all have limitations. The five forces and strategic group models present a static picture of competition that deemphasizes the role of innovation. Yet innovation can revolutionize industry structure and completely change the strength of different competitive forces. The five forces and strategic group models have been criticized for deemphasizing the importance of individual company differences. A company will not be profitable just because it is based in an attractive industry or strategic group; much

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Strategic Management more is required. The industry life cycle model is a generalization that is not always followed, particularly when innovations revolutionize an industry. 13. The macro environment affects the intensity of rivalry within an industry. Included in the macro environment are the macroeconomic environment, the global environment, the technological environment, the demographic and social environment, and the political and legal environment.

Summary of Chapter-3 1. Distinctive competencies are the firm-specific strengths of a company. Valuable distinctive competencies enable a company to earn a profit rate that is above the industry average. 2. The distinctive competencies of an organization arise from its resources (its financial, physical, human, technological, and organizational assets) and capabilities (its skills at coordinating resources and putting them to productive use). 3. In order to achieve a competitive advantage, a company needs to pursue strategies that build on its existing resources and capabilities and formulate strategies that build additional resources and capabilities (develop new competencies). 4. The source of a competitive advantage is superior value creation. 5. To create superior value, a company must lower its costs or differentiate its product so that it creates more value and can charge a higher price or do both simultaneously. 6. Managers must understand how value creation and pricing decisions affect demand and how costs change with increases in volume. They must have a good grasp of the demand conditions in the company’s market and the cost structure of the company at different levels of output if they are to make decisions that maximize the profitability of their enterprise. 7. The four building blocks of competitive advantage are efficiency, quality, innovation, and responsiveness to customers. These are generic distinctive competencies. Superior efficiency enables a company to lower its costs; superior quality allows it to charge a higher price and lower its costs; and superior customer service lets it charge a higher price. Superior innovation can lead to higher prices, particularly in the case of product innovations, or lower unit costs, particularly in the case of process innovations. 8. If a company’s managers are to perform a good internal analysis, they need to be able to analyze the financial performance of their company, identifying how the strategies of the company relate to its profitability, as measured by the ROIC. 9. The durability of a company’s competitive advantage depends on the height of barriers to imitation, the capability of competitors, and environmental dynamism. 10. Failing companies typically earn low or negative profits. Three factors seem to contribute to failure: organizational inertia in the face of environmental change, the nature of a company’s prior strategic commitments, and the Icarus paradox. 11. Avoiding failure requires a constant focus on the basic building blocks of competitive advantage, continuous improvement, identification and adoption of best industrial practice, and victory over inertia.

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Summary of Chapter-4 1. A company can increase efficiency through a number of steps: exploiting economies of scale and learning effects; adopting flexible manufacturing technologies; reducing customer defection rates; implementing JIT systems; getting the R&D function to design products that are easy to manufacture; upgrading the skills of employees through training; introducing self-managing teams; linking pay to performance; building a company-wide commitment to efficiency through strong leadership; and designing structures that facilitate cooperation among different functions in pursuit of efficiency goals. 2. Superior quality can help a company lower its costs, differentiate its product, and charge a premium price. 3. Achieving superior quality demands an organization-wide commitment to quality and a clear focus on the customer. It also requires metrics to measure quality goals and incentives that emphasize quality, input from employees regarding ways in which quality can be improved, a methodology for tracing defects to their source and correcting the problems that produce them, a rationalization of the company’s supply base, cooperation with the suppliers that remain to implement TQM programs, products that are designed for ease of manufacturing, and substantial cooperation among functions. 4. The failure rate of new-product introductions is high because of factors such as uncertainty, poor commercialization, poor positioning strategy, slow cycle time, and technological myopia (:when someone cannot see things that are far away clearly). 5. To achieve superior innovation, a company must build skills in basic and applied research; design good processes for managing development projects; and achieve close integration between the different functions of the company, primarily through the adoption of crossfunctional product development teams and partly parallel development processes. 6. To achieve superior responsiveness to customers often requires that the company achieve superior efficiency, quality, and innovation. 7. To achieve superior responsiveness to customers, a company needs to give customers what they want when they want it. It must ensure a strong customer focus, which can be attained by emphasizing customer focus through leadership; training employees to think like customers; bringing customers into the company through superior market research; customizing products to the unique needs of individual customers or customer groups; and responding quickly to customer demands.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com Mobile: 01198150195 http://jagannath.academia.edu/jony007ex

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Summary of Chapter-5 1. To create a successful business model, managers must choose business-level strategies that give the company a competitive advantage over its rivals; that is, they must optimize competitive positioning. They must first decide on (a) Customer needs, or what is to be satisfied; (b) Customer groups, or who is to be satisfied; and (c) Distinctive competencies, or how customer needs are to be satisfied. These decisions determine which strategies they formulate and implement to put a company’s business model into action. 2. Customer needs are desires, wants, or cravings that can be satisfied through the attributes or characteristics of a product. Customers choose a product based on (a) the way a product is differentiated from other products of its type and (b) the price of the product. Product differentiation is the process of designing products to satisfy customers’ needs in ways that competing products cannot. Companies that create something distinct or different can often charge a higher, or premium, price for their products. 3. If managers devise strategies to differentiate a product by innovation, excellent quality, or responsiveness to customers, they are choosing a business model based on offering customers differentiated products. If managers base their business model on finding ways to reduce costs, they are choosing a business model based on offering customers low-priced products. 4. The second main strategy in formulating a successful business model is to decide what kind of product(s) to offer to which customer group(s). Market segmentation is the way a company decides to group customers, based on important differences in their needs or preferences, to gain a competitive advantage. 5. There are three main approaches toward market segmentation. First, a company might choose to ignore differences and make a product targeted at the average or typical customer. Second, a company can choose to recognize the differences between customer groups and make a product targeted toward most or all of the different market segments. Third, a company might choose to target just one or two market segments. 6. To develop a successful business model, strategic managers have to devise a set of strategies that determine (a) how to differentiate and price their product and (b) how much to segment a market and how wide a range of products to develop. Whether these strategies will result in a profitable business model now depends on a strategic manager’s ability to provide customers with the most value while keeping the cost structure viable. 7. The value creation frontier represents the maximum amount of value that the products of different companies inside an industry can give customers at any one time by using different business models. Companies on the value frontier are those that have the most successful business models in a particular industry. 8. The value creation frontier can be reached by choosing among four generic competitive strategies: cost leadership, focused cost leadership, differentiation, and focused differentiation. 9. A cost-leadership business model is based on lowering the company’s cost structure so it can make and sell goods or services at a lower cost than its rivals. A cost leader is often a large, national company that targets the average customer. Focused cost leadership is developing the right strategies to serve just one or two market segments.

Department of Finance

Jagannath University, Dhaka.

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Strategic Management 10. A differentiation business model is based on creating a product that customers perceive as different or distinct in some important way. Focused differentiation is providing a differentiated product for just one or two market segments. 11. The middle of the value creation frontier is occupied by broad differentiators, which have pursued their differentiation strategy in a way that has also allowed them to lower their cost structure over time. 12. Strategic-group analysis helps companies in an industry better understand the dynamics of competitive positioning. In strategic-group analysis, managers identify and chart the business models and business-level strategies their industry rivals are pursuing. Then they can determine which strategies are successful and unsuccessful and why a certain business model is working or not. In turn, this allows them to either fine-tune or radically alter their business models and strategies to improve their competitive position. 13. Many companies, through neglect, ignorance, or error, do not work to continually improve their business model, do not perform strategic group analysis, and often fail to identify and respond to changing opportunities and threats. As a result, their business-level strategies do not work together, their business model starts to fail, and their profitability starts to decline. There is no more important task than ensuring that one’s company is optimally positioned against its rivals to compete for customers.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com Mobile: 01198150195 http://jagannath.academia.edu/jony007ex

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

Department of Finance

Jagannath University, Dhaka.

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Strategic Management

Summary of Chapter-6

1. Technical standards are important in many high-tech industries: they guarantee compatibility, reduce confusion in the minds of customers, allow for mass production and lower costs, and reduce the risks associated with supplying complementary products. 2. Network effects and positive feedback loops often determine which standard comes to dominate a market. 3. Owning a standard can be a source of sustained competitive advantage. 4. Establishing a proprietary standard as the industry standard may require the company to win a format war against a competing and incompatible standard. Strategies for doing this include producing complementary products, leveraging killer applications, using aggressive pricing and marketing, licensing the technology, and cooperating with competitors. 5. Many high-tech products are characterized by high fixed costs of development but very low or zero marginal costs of producing one extra unit of output. These cost economics create a presumption in favor of strategies that emphasize aggressive pricing to increase volume and drive down average total costs. 6. It is very important for a fi rst mover to develop a strategy to capitalize on first-mover advantages. A company can choose from three strategies: develop and market the technology itself, do so jointly with another company, or license the technology to existing companies. The choice depends on the complementary assets required to capture a first-mover advantage, the height of barriers to imitation, and the capability of competitors. 7. Technological paradigm shifts occur when new technologies come along that revolutionize the structure of the industry, dramatically alter the nature of competition, and require companies to adopt new strategies to survive. 8. Technological paradigm shifts are more likely to occur when progress in improving the established technology is slowing because it is giving diminishing returns and a new disruptive technology is taking root in a market niche. 9. Established companies can deal with paradigm shifts by hedging their bets with regard to technology or setting up a stand-alone division to exploit the technology.

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

Department of Finance

Jagannath University, Dhaka.

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Strategic Management

Summary of Chapter-7(Chapter-9) 1. A corporate strategy should enable a company, or one or more of its business units, to perform one or more of the value creation functions at a lower cost or in a way that allows for differentiation and a premium price. 2. The corporate-level strategy of horizontal integration is pursued to increase the profitability of a company’s business model by (a) reducing costs, (b) increasing the value of the company’s products through differentiation, (c) replicating the business model, (d) managing rivalry within the industry to reduce the risk of price warfare; and (e) increasing bargaining power over suppliers and buyers. 3. There are two drawbacks associated with horizontal integration: (a) the numerous pitfalls associated with making mergers and acquisitions, and (b) the fact that the strategy can bring a company into direct conflict with antitrust authorities. 4. The corporate-level strategy of vertical integration is pursued to increase the profitability of a company’s “core” business model in its original industry. Vertical integration can enable a company to achieve a competitive advantage by helping build barriers to entry, facilitating investments in specialized assets, protecting product quality, and helping to improve scheduling between adjacent stages in the value chain. 5. The disadvantages of vertical integration include increasing bureaucratic costs if a companyowned or in-house supplier becomes lazy or inefficient, and it reduces flexibility when technology is changing fast or demand is uncertain. 6. Entering into a long-term contract can enable a company to realize many of the benefits associated with vertical integration without having to bear the same level of bureaucratic costs. However, to avoid the risks associated with becoming too dependent on its partner, it needs to seek a credible commitment from its partner or establish a mutual hostage-taking situation. 7. The strategic outsourcing of noncore value creation activities may allow a company to lower its costs, better differentiate its products, and make better use of scarce resources, while also enabling it to respond rapidly to changing market conditions. However, strategic outsourcing may have a detrimental effect if the company outsources important value creation activities or becomes too dependent on the key suppliers of those activities.

Md. Mazharul Islam (Jony) ID no:091541, 3rd Batch. Department of Finance. Jagannath University. Email:jony007ex@gmail.com Mobile: 01198150195 http://jagannath.academia.edu/jony007ex

Department of Finance

Khadizatuz Zohara (Mily) ID no:091526, 3rd Batch. Department of Finance. Jagannath University. Email: milly007ex@gmail.com

Jagannath University, Dhaka.

122 | P a g e


Strategic Management

Summary of Chapter-7(Chapter-10) 1. Strategic managers often pursue diversification when their companies are generating free cash flow, that is, financial resources they do not need to maintain a competitive advantage in the company’s core industry that can be used to fund profitable new business ventures. 2. A diversified company can create value by (a) transferring competencies among existing businesses, (b) leveraging competencies to create new businesses, (c) sharing resources to realize economies of scope, (d) using product bundling, and (e) taking advantage of general organizational competencies that enhance the performance of all business units within a diversified company. The bureaucratic costs of diversification rise as a function of the number of independent business units within a company and the extent to which managers have to coordinate the transfer of resources between those business units. 3. Diversification motivated by a desire to pool risks or achieve greater growth often results in falling profitability. 4. There are three methods companies use to enter new industries: internal new venturing, acquisition, and joint ventures. 5. Internal new venturing is used to enter a new industry when a company has a set of valuable competencies in its existing businesses that can be leveraged or recombined to enter a new business or industry. 6. Many internal ventures fail because of entry on too small a scale, poor commercialization, and poor corporate management of the internal venture process. Guarding against failure involves a carefully planned approach toward project selection and management, integration of R&D and marketing to improve the chance new products will be commercially successful, and entry on a scale large enough to result in competitive advantage. 7. Acquisitions are often the best way to enter a new industry when a company lacks the competencies required competing in a new industry, and it can purchase a company that does have those competencies at a reasonable price. Acquisitions are also the method chosen to enter new industries when there are high barriers to entry and a company is unwilling to accept the time frame, development costs, and risks associated with pursuing internal new venturing. 8. Acquisitions are unprofitable when strategic managers (a) underestimate the problems associated with integrating an acquired company, (b) overestimate the profit that can be created from an acquisition, (c) pay too much for the acquired company, and (d) perform inadequate pre-acquisition screening to ensure the acquired company will increase the profitability of the whole company. Guarding against acquisition failure requires careful preacquisition screening, a carefully selected bidding strategy, effective organizational design to successfully integrate the operations of the acquired company into the whole company, and managers who develop a general managerial competency by learning from their experience of past acquisitions. 9. Joint ventures are used to enter a new industry when (a) the risks and costs associated with setting up a new business unit are more than a company is willing to assume on its own, and (b) a company can increase the probability that its entry into a new industry will result in a successful new business by teaming up with another company that has skills and assets that complement its own. 10. Restructuring is often required to correct the problems that result from (a) a business model that no longer creates competitive advantage,(b) the inability of investors to assess the competitive advantage of a highly diversified company from its financial statements, (c) excessive diversification because top managers who desire to pursue empire building that results in growth without profitability, and (d) innovations in strategic management such as strategic alliances and outsourcing that reduce the advantages of vertical integration and diversification. Department of Finance

Jagannath University, Dhaka.

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Strategic Management

Summary of Chapter-8(Chapter-11) 1. Stakeholders are individuals or groups that have an interest, claim, or stake in the company, in what it does, and in how well it performs. 2. Stakeholders are in an exchange relationship with the company. They supply the organization with important resources (or contributions) and in exchange expect their interests to be satisfied (by inducements). 3. A company cannot always satisfy the claims of all stakeholders. The goals of different groups may conflict. The company must identify the most important stakeholders and give highest priority to pursuing strategies that satisfy their needs. 4. A company’s stockholders are its legal owners and the providers of risk capital, a major source of the capital resources that allow a company to operate its business. As such, they have a unique role among stakeholder groups. 5. Maximizing long-run profitability and profit growth is the route to maximizing returns to stockholders, and it is also consistent with satisfying the claims of several other key stakeholder groups. 6. When pursuing strategies that maximize profitability, a company has an obligation to do so within the limits set by the law and in a manner consistent with societal expectations. 7. An agency relationship arises whenever one party delegates decision-making authority or control over resources to another. 8. The essence of the agency problem is that the interests of principals and agents are not always the same, and some agents may take advantage of information asymmetries to maximize their own interests at the expense of principals. 9. Several governance mechanisms serve to limit the agency problem between stockholders and managers, including the board of directors, stock-based compensation schemes, financial statements and auditors, and the threat of a takeover. 10. The term ethics refers to accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople, and an ethical strategy is one that does not violate these accepted principles. 11. Unethical behavior is rooted in poor personal ethics—the inability to recognize that ethical issues are at stake, as when there are psychological and geographical distances between a foreign subsidiary and the home office: a failure to incorporate ethical issues into strategic and operational decision making; a dysfunctional culture; and failure of leaders to act in an ethical manner. 12. To make sure that ethical issues are considered in business decisions, managers should (a) favor hiring and promoting people with well-grounded senses of personal ethics; (b) build an organizational culture that places a high value on ethical behavior; (c) make sure that leaders within the business not only articulate the rhetoric of ethical behavior but also act in a manner that is consistent with that rhetoric; (d) put decision-making processes in place that require people to consider the ethical dimension of business decisions; (e) use ethics officers; (f) have strong corporate governance procedures; and (g) be morally courageous and encourage others to be the same.

Department of Finance

Jagannath University, Dhaka.

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Strategic management